In Times of Stress, Female Fund Managers Take Less Risk Than Men — For the Same Performance
Fund investors don’t receive compensation for the higher risk that male managers take on, according to new research.
Female fund managers tend to play it safe during periods of negative market sentiment, while male investors take on more risk. But in the end, their risk-adjusted performance is the same, according to new research.
Those are the findings of researchers who set out to determine the differences between the risk-taking of male and female portfolio managers when markets are under stress, which often presents good buying opportunities. The question is an important one as some of the best investors, those with the highest risk-adjusted, long-term returns, are contrarians who aren’t afraid to put money to work during crises. Although academics have long studied the role of gender in retail investors’ risk-taking behavior, far less research has been done on the behavior of individuals at institutions. investors.
The research paper from scholars at Universität Tübingen and the University of Hohenheim in Germany found that male and female fund managers hold different levels of unsystematic risk in their portfolios amid negative market sentiment.
Authors Monika Gehde-Trapp and Linda Klingler analyzed the actions that male and female fund managers take when markets are stressed. Specifically, they measured the total risk taken by these managers during periods when the CBOE volatility index (VIX), informally known as the Fear Index, was high once it was adjusted for the state of the economy. The study used data from the Center for Research in Security Prices Survivor-Bias Free Mutual Fund Database and included diversified, domestic U.S. equity funds run by single managers between January 1992 and December 2015.
Gehde-Trapp and Klingler conducted their research with two hypotheses. First, using these measures of market sentiment, the authors worked under the assumption that rational fund managers will increase their exposure to systematic risk when sentiment is negative because stocks are likely to be undervalued during these periods. As a result, these rational managers will be more active in the market, take more risky bets, and be more aggressive with long positions, according to the paper.
The author’s second hypothesis was that female fund managers react less strongly to sentiment: “Compared to their male counterparts, they trade less when sentiment changes and take on less aggressive long positions, use less active investment styles, and take on less risky bets when sentiment is bad,” wrote the authors, commenting on their hypothesis going into the study. This assumption is based on previous studies that have explored differences in sentiment between male and female managers, including women’s increased sensitivity to uncertainty and ambiguity when investing. But the authors clarified in the new study that, “In contrast, we explore the differential reactions between male and female investors to the same market wide sentiment.”
Using these two hypotheses as the basis of the paper, the authors found that male managers take on “significantly more” total fund risk and unsystematic risk when sentiment is bad. In contrast, during periods of bad sentiment, female fund managers have significantly less risky portfolios — by about 50 percent — as measured by unsystematic risk than their male counterparts. Fund risk is the annualized standard deviation of monthly fund returns, while systematic risk refers to style premiums such as value. Investors are compensated for systematic risks they take by higher-than-market returns over a market cycle.
The authors then evaluated how the risk-taking affected performance and whether the higher risk-taking by the male managers paid off. The study found that it did not. “We find no significant relation between the higher risk due to bad sentiment and performance. Hence, fund investors do not receive a compensation for the higher risk that (male) managers take on,” the authors wrote.
Male fund managers take on a higher amount of unsystematic risk during periods of bad sentiment because they place more active bets, the authors concluded. While this effect is the same for female fund managers, it is more muted because female fund managers tend to be more risk-averse.
A high amount of unsystematic risk in a portfolio is not tied to higher expected returns and better performance. Instead, the unsystematic risk present in male manager portfolios indicates that male fund managers are placing “unrewarded risks” into their investors’ portfolios.
“The increase in unsystematic risk indicates a higher propensity of male fund managers to gamble at the expense of the fund investors,” Gehde-Trapp and Klingler wrote.
Unrewarded or uncompensated risk arises when a portfolio manager takes on exposure to certain sectors, regions, countries, and macroeconomic environments that don’t add to the portfolio’s overall return. Instead, this exposure adds a lot of risk.
Michael Hunstad, chief investment officer for global equities at Northern Trust Asset Management, who declined to comment on the study specifically, said that managers with high amounts of uncompensated risk in their portfolio forgo certainty in their investments.
“The more uncompensated risk you take, the more uncertainty you have,” Hunstad said. “Ideally, what you want is a focused exposure on those risks that you get paid to take and then no other interference. All that uncompensated risk is effectively just interference.”