Race and Hedge Funds

Minority operated hedge funds deliver higher alphas, Sharpe ratios, and information ratios than do non-minority operated hedge funds. Moreover, minority fund managers attended more prestigious schools and are more likely to hold post-graduate degrees. Yet, minority managers garner lesser start-up capital and attract lower investor flows. Racial homophily drives investors' appetite for non-minority funds. To address endogeneity, we leverage on an event study of minority manager fund transitions and an instrumental variable analysis that exploits racial imprinting during childhood. Our results extend to actively managed equity mutual funds and suggest that racial minorities face significant taste-based discrimination in asset management.