Here’s an interesting fact about women investors: they’re better than men.
That isn’t as much a value judgment as it is an empirical fact. A few studies have shown women traders and investors tend to outperform men, and a new study yet again confirms these findings. Openfolio released an analysis of 60,000 users of its platform and found that women outperformed men by 0.4% on average in 2014. Remember 2014 was a good year for the markets, as the heady highs of 2013 continued into the new year.
An alpha of 0.4% might not sound like a lot, but remember that expense ratios for several managed funds, especially low-cost index funds and ETFs, are at that level or lower. So a firm that capitalizes on better-performing women investors can effectively double its margin on its investment products. Yet the majority of Wall Street analysts and traders are still men, even today.
But there’s another reason why this study is worth considering. On top of the outperformance in a bull year, the study also found female investors lost less in down years. In 2015, which was not a good year for just about anyone, women lost 2.5% on average versus 3.8% for men. That’s an alpha of 1.3%, or 3x the outperformance in a good year.
This is even more important than the bullish outperformance. By losing less in down years, female investors can withstand the downside risk that is inherent in stocks. And so much of money management is about managing risk. After all, alpha isn’t calculated as an outperformance of an index; it’s an outperformance of an index on a risk-adjusted basis. Risk adjustment is done to offset the randomness of the market. Some people can get lucky by throwing all their chips on one bet, but they won’t get lucky all the time—and winning against your competition when everyone is losing means you’re not just getting lucky, but you’re choosing a less risky approach to the markets overall.
This confirms the findings of past studies, which showed women tend to avoid high-risk bets when investing. This is a very good thing, because high-risk bets lead to exposure to black swan events like 2008. While a high-risk bet can end up giving you a big payoff if you’re right, it can also mean a dramatic loss if you’re wrong.
The great thing about investing is that one doesn’t have to play this binary game. Instead, one can take advantage of things like modern portfolio theory, diversification, hedging, and so on to mitigate risk and limit exposure. That’s what financial professionals are paid to do, and it seems like women do that more naturally than men.
What does this mean for the future of Wall Street? We’re not sure, but it warrants attention. If female investors continue to outperform men, there might be a big market opportunity here to capitalize on their potential and drive returns for investors. One day, a firm will realize this and capitalize on the opportunity. The question that remains: who will do it, and when?