Diverse Hedge Funds

We explore the value of diversity for hedge funds. We show that fund management teams with heterogeneous education backgrounds, work experiences, nationalities, genders, and races, outperform homogeneous teams by 5.03% to 8.10% per annum after adjusting for risk. An event study of diversity-enhancing manager team transitions and an instrumental variable analysis that exploits the demographic diversity at hedge fund founders' hometowns help address endogeneity. Diverse teams outpace homogeneous teams by exploiting a wider range of long-horizon investment opportunities, avoiding behavioral biases, and eschewing downside risks. Diversity allows hedge funds to circumvent capacity constraints. Consequently, performance persists more for diverse teams