In 2012, the two founding partners of Canyon made the strategic decision to elevate a select few to partnership status. This was not only a prestigious title and the highest level of seniority at the firm, it also meant a different compensation scheme. In the industry, partners generally earn a percentage of the incentive fees of the firm and, should the firm be sold, get a cut on the upside. Partners feel more like owners than employees. This new partnership structure did not emerge just out of a generous desire to share the wealth, although I could conceive that it was a large contributor to it — if I were an ingénue rather than a trader, that is. No, it was chiefly a thoughtful retention plan, spurred, I reckon, by the unexpected departure of Canyon’s most senior employee and head of research. Turnover is harmful to any business, but it is particularly damaging to hedge funds, who have no other assets than the brainpower and expertise of their employees.
I made the cut. I was the only female of the additional seven partners in Canyon’s initial expansion, and the sole female portfolio manager. I was used to this, of course. In most meetings, both in-house and on the road, there was usually one woman — yours truly — as compared to eight or more men. My recurring joke before sitting down to a business dinner was, “Shall we do one girl, one boy around the table?” I know, it’s not particularly funny. But then again, neither are wisecracks about women’s purses (messy, expensive, and proliferating) and women’s shoes (uncomfortable, expensive, and proliferating). If I may offer an unbidden word of wisdom to all funnymen out there on Wall Street, these jokes are, at best, tedious.
Understand one thing: There were, and still are, doggedly few senior women in hedge funds and almost none in the position of investing. You will find women in investment banks (corporate finance, capital markets, and sales and trading), including some in senior positions. Corporate law firms are likewise relatively diverse in gender. But as far as women in hedge funds, zilch. According to a 2015 survey by EY, KPMG, and Morningstar, only 2 percent of hedge funds are run by women. Less than one in twenty hedge funds employs a female portfolio manager. Female-run funds manage less than 1 percent of the industry assets. And so it goes with the depressing numbers, but you get the picture. And why is that, pray? Because change requires impetus and incentives. Unless clients require hedge funds to have women on their teams and refuse to invest in funds that do not, there is no external incentive. BlackRock, State Street, and Fidelity paved the way in 2017, when they tackled the issue of diversity on the boards of public companies. They pressured companies and threatened to vote against sitting directors at companies with boards made up only of men. It worked. Women now hold 28 percent of all board seats at major corporations. Only one S&P 500 company is left with an all-male board. After a California law required that all public companies based in the state have at least one woman director by the end of last year and three by the end of 2021, women claimed almost half of new board seats.
And until hedge funds have internalized data that demonstrates heterogeneous investment teams outperform homogeneous ones, there is no impetus either. Abundant research from both the private sector and academia proves the efficacy of diversity in corporate profit, growth, and decision-making — trust me, it applies to hedge funds too. Imagine my annoyance reading this quote in a Business Insider article from a headhunter at Long Ridge Partners, a specialized recruiting firm for the investment management industry: “Most funds want to go out and hire the best talent. They don’t care if it’s a man or a woman.” Alas, it is hard to so thoroughly miss the point. Does he ever watch sports? It isn’t the best talent that wins; it’s the best team. A great baseball team doesn’t have nine great hitters. Even I know that, and no one ever called me a sports fan.
Absent both incentives and impetus, no amount of Sheryl Sandberg’s call to “lean in” will make a difference to average numbers. At the margin, will it help some women forge a trailblazing path? Absolutely. Just as I hope that my own technique will. In keeping with a two-word commandment, I opt to hang on. Or I raise you to three: stick with it. As for societal changes, however, a motto will not do. To lean in, you must first be let in.
In distressed investing, it’s even rarer to find women at the top. Anecdotally (although it in fact may turn out to be statistically significant), in my twenty years of working for a hedge fund, I have met one other female partner, Meridee Moore.
Meridee was a pioneer in distressed investing. After ten years working for the hedge fund of Tom Steyer (yes, as in the 2020 democratic presidential candidate) in the ’90s and becoming the only female partner, she hung out her shingle in 2002. Watershed Asset Management managed over $2 billion in assets in the heyday and became an extraordinarily successful fund. Here is where it gets interesting, though. She decided to shut down in 2015 and proceeded to return all external capital. Not because she had lost money — au contraire — or had reached an age at which you would hesitate to give anyone your kid’s monthly allowance anyway (Carl Icahn is eighty-four years old — think about that). No, she believed that the field was too crowded, the alpha generators gone, and future returns not high enough for the fees. She turned out to be prescient and a pioneer there too. We had a working relationship for over two decades until we served together as independent directors on a corporate board. We became friends despite her incessant use of the most obscure and perplexing — at least to a non-native speaker — American colloquialisms. She had me mesmerized the first time she admonished us directors to “keep our knees bent.” It turned out to simply mean to be ready — did everyone else know that? — but I quietly resolved to enhance both my vocabulary and my investing acumen through the relationship.
Meridee exhibited all the right pedigrees. She was a lawyer by trade but had worked for Lehman Brothers. She had coauthored a chapter on distressed bank debt trading with Marty Whitman for the economist, professor, and prolific author Frank Fabozzi (whose books you no doubt own, if you’ve ever taken a finance class). She joined the hedge fund world at the right time and traded some incredibly complex situations, including the liquidations of investment firm Drexel Burnham Lambert and Integrated Resources, when distressed trading was in its infancy. She was the only female investor and made partner within a year at Farallon Capital Management. Being a woman was an “advantage,” she said, because CEOs remembered her and lawyers and traders liked her. Raising money in 2002 to open Watershed, her own fund, was relatively “easy” — she had great references and a ten-year track record of making money. Most important, she had the Farallon brand recognition and a large seed investment from Tom Steyer. I had to dig hard to hear even a smidge of frustration with the male environment she had worked in all her life. “I just put my head down and competed,” she explained. When I finally extracted them from her, some of her experiences echoed mine, including the internal scuffles and battle to retain her best analysts. One was different and revealing. Investors had expected her to perform better — i.e., lose less money — in the Global Financial Crisis of 2008 than her male counterparts. “Because I am a woman,” she told me, “I think investors assumed me to be more risk averse.” Of course, said investors would have surely taken their money out if she had indeed been more risk averse and produced less profit before the crash. Further, Meridee confirmed my view that after the crisis, money allocators started favoring large funds over return potential. “The ex-Goldman Sachs guys running sizeable institutions became an easier choice.”
“Because of safer returns?” I asked.
“Safer, yes, but not in terms of returns,” she responded, “safer for the allocators’ jobs. No one in their investment committees would question the decision to go with a known quantity. A lot of them were scared and perceived sticking with a mid-size fund run by a woman as an added risk.”
Watershed’s performance in the top third of funds allowed it to survive the crisis and retain over $1 billion of assets. It illustrated stunningly well the research papers that find that, although the performance of female hedge fund managers is equal or better, they consistently attract fewer assets. Women must outperform men if they want to stay in the business, but even when they do, investors are reluctant to entrust them with their money, thereby keeping women’s funds small. After 2008, size itself became a detractor. The vicious loop was closed.
If I assembled all the female senior investors I know in hedge funds, we would hardly constitute a book club. Mind you, I would boldly suggest that we all read my book, which would provide me with a small but passionate reader base.
Five years after I became a partner, the Hedge Fund Journal selected me for their annual ranking of the 50 Leading Women in Hedge Funds. To get to the number fifty, a large swath of those women included were not in hedge funds at all but rather bankers, accountants, and lawyers. Of the hedge fund women per se, a minority of us were investors, while a majority worked in the “soft” departments like marketing and investor relations. These are not the profit centers, and their members are not the big moneymakers. I was immodestly pleased with this inclusion, as you can imagine, and my husband ceremoniously announced its publication to our children over dinner. One of them ruminated on the startling fact that there really were, what, as many as fifty women in my business? The other one raised an eyebrow and inquired suspiciously, “Exactly which number are you?”
Dominique Mielle is a former partner and senior portfolio manager at Canyon Capital, where she spent 20 years working in distressed investing. She writes about her experiences in her new book, Damsel in Distressed: My Life in the Golden Age of Hedge Funds.