Why women outperform male money managers: Biological, cognitive, and behavioral aspects

Why women outperform male money managers: Biological, cognitive, and behavioral aspects

Meredith Jones is an alternative investment consultant and author of Women of The Street: Why Female Money Managers Generate Higher Returns (and How You Can Too).

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Meredith discusses her research in alternative investments, pointing to significant outperformance of women run hedge funds, a 6% differential over a 6.5 year period. She talks about separate studies that have been done on 35,000 brokerage accounts and 2.7 million IRA accounts, both showing significant outperformance of women over men, as supporting evidence of her perspective.

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What explains this outperformance?

According to Meredith, biological factors such as hormone levels and their interaction and brain structure can impact stress levels and risk taking. In combination with cognitive components like probability weighting, matching expected outcomes with actual outcomes, and less overconfidence, these biological and cognitive differences lead to identifiable patterns that can create higher returns, such as less trading and a lower likelihood of selling into a market drawdown.These patterns result in higher returns for women.

More and more investors have started to look for more diversification based on gender and race, recognizing that there are real, measurable, and explainable diversification and return generation benefits to women run hedge funds.

While alpha is traditionally viewed as a result of specific strategies/sectors, investing skill, or often pure dumb luck, investors too often ignore the alpha that can be generated by different patterns in behavior in investment portfolios, particularly the disparity between the behavior of men and women which can add diversification and generate higher returns. Maybe most importantly, Meredith's work has shown that these differences are not the result of unsystematic and unsustainable biases like sample or size, but rather based on real biological, cognitive, and behavioral aspects, and therefore sustainable.

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