A recent Knight Foundation study found that only 1.4% of America’s wealth is handled by asset management firms owned by women and/or people of color, even though there is zero difference in the performance of the more diverse firms. Former hedge fund employee and current sociologist Megan Tobias Neely’s new book The Wall Street Inequality and Insecurity are Being Heeded Out takes on a small but crucial slice of that issue as it explores how the structure and practices of hedge funds contribute to the continuing lack of diversity within the industry’s ranks, and how that affects the rest of us. TIME spoke to her about the topic.
The number of hedge funds was 3,000 in 2003. They managed approximately $500 billion. Today, there are approximately 12,000 hedge fund managers and an estimated $4.3 trillion of assets. It has grown at such a rapid pace.
They’re really a phenomenon of the last 20 years. They’ve just skyrocketed. My argument in the book says that investors are moving money via trust-based networks, rather than bureaucratic ones. All major banks and investment institutions now have hedge funds units. It’s largely been made possible because of deregulation.
You write in your book that hedge funds can be a major driver of inequality. How?
In the US, an average family takes home $51,000. That’s a whole household’s earnings, whereas in hedge funds, the average portfolio manager takes home $1.4 million. The average household income for entry-level analysts is $680,000. This puts them just above the threshold of the top 1 percent of households’ earnings. These incomes are the main contributors to inequality. However, I focused on how funds’ everyday operations effectively protect some individuals and let them in to these elite circles that create top incomes.
We don’t care about the inequality in a hedge fund. Don’t we have much bigger problems?
Yeah, the women and the men of color I interviewed said, ‘I have no right to complain. I’m doing just fine.’ There are worse issues in society. However, this industry is almost all run by white males. 97% are owned by white men. It’s kind of mind boggling, how much control they have over it. The real focus of this book is that when you restrict who can access such enormous rewards and power, what you end up with is a sphere of society where people really can dictate their own terms, and this is happening in this context at a level that’s unprecedented. This is a different level of concentration in wealth and power among the elite white men who work in the hedge funds industry. These men can protect themselves against oversight. These people can pay less taxes and demand high fees. Part and parcel of the social world they’ve created for themselves is that it’s walled off from others and people who aren’t like them. They don’t realize that they’re creating this environment for just a very select few.
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They have organizations such as these. How can they justifiy it? They don’t want to try to be more varied.
It is something they see in many ways. They want to leave the large investment banks. They are very fed up with the bureaucracy, big government and their own behavior. Because they believe that everyone can enter small companies, they set up equal bureaucratic and government structures. But what they don’t realize is that when you’re the leader, you may be comfortable in a setting that other people are not. When you’re hand picking people who are exactly like you, who will behave and act and think like you, you just think ‘oh, it’s a good fit.’ Cloaked behind designations of who might be ‘a good fit’ are other sort of sexist and racist beliefs that you may not even realize you have. That’s part of what keeps people out and then allows them to have like-minded workers, who then say, ‘Yeah, these incomes make sense. They’re justified. We’ve worked really hard. It’s 80 hours per week. We deserve this.’
What is the effect of risk on the hedge funds’ insularity?
At hedge funds, they would all say, ‘Oh we’re calculated risk takers; we’re not taking too bold of a risk.’ They all feel it is very justified. But what is often implicit in this picture is that because white men have worked in hedge funds for so long, they’re understood as being the most capable of mastering risks. My interviews revealed that women managers of hedge funds were often seen as being too risk-averse. This assumption was that women would be more cautious with their risk taking. Women were more likely to take the same risks than men, but women who took on greater risk were seen as being less risk-averse. The same goes for Black traders, who were perceived aggressively but took the same risks that their counterparts. In these implicit perceptions of risk, there are implicit notions regarding gender and race. These ideas can also be used to determine who is trustworthy and qualified to take on risk.
This problem is not only affecting hedge funds. Does this not apply to investment banking as well?
What’s really distinct about hedge funds is they are unfettered from as much regulatory scrutiny and oversight. Many people don’t understand what hedge funds do; it’s deliberately opaque. They’re investing in assets the worth of which is hard to evaluate in any given moment. So they’re hard to regulate. In terms of taxes, they can make use of this opacity. Hedge funds typically last for five years. They’re not very sustainable. Workers are prepared to move around to avoid that uncertain future. These workers do it by creating close-knit communities. Many hedge fund managers will hire individuals they believe are similar to them. They might then mentor and invest later in their firm. And it’s these tight knit networks that then allow for the funneling of resources and ultimately these higher incomes.
Isn’t it true that because they manage a lot of pensions and state funds and that money is then redistributed to working people, that they could actually have a positive impact on income inequality?
Yeah, the average person assumes that they’re not affected by hedge funds, and they probably can’t afford to invest directly in a hedge fund. But most hedge fund investors are large institutions—pension funds, municipal or state government funds or federal government funds, nonprofit endowments. We are all affected by the investment returns or impact they have on society in some way. They are well aware of the fact that they have a pension fund holder as their average investor. But they charge such high fees, it doesn’t necessarily help those pension fund workers that they express the need to do right by. I was in one executive’s office asking about the impact on society of her work. And she lowered her voice said, ‘I just think the fees are too high. But don’t say that around here.’ Others said essentially, ‘We’re just moving money around, but we’re charging so many fees, so many layers are skimmed off, that ultimately it doesn’t benefit the people we’re supposed to serve.’
Wouldn’t most successful hedge fund employees say that they take big risks, and therefore, they reap big rewards?
It was fascinating to hear portfolio managers talk about the risks they took. They’re really socialized into taking risks. One woman shared her fear when she first lost one million dollars on a trade. She thought that she was about to be fired. And when she told her manager he said, ‘Welcome to the game,’ and they celebrated. It was something that people talked about often, this type of social conditioning for risk taking and learning to accept losses. They had so many million dollar trades where their models played out, and that was so satisfying—and they described it in this kind of gamer or scientist way—that by the time they reached a billion dollar trade, they were confident that it would play out. This kind of risk-taking was very well calculated. They were delighted to watch the model come together as it did. So they don’t see it as reckless risk taking by any means.
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Your book claims that hedge funds reduce the payrolls of ordinary people. What is the secret to this?
This is something that we don’t often hear as much about. It’s very similar to what private equity firms do. Some activist hedge funds will become involved in a company’s management and put pressure on the company to do things to maximize profits for them as the investor. This often involves laying people off, outsourcing labor or streamlining processes in ways that really weaken the average worker’s bargaining power. The other way is to place pressure on stock prices. Executives interpret this as an indication that they are determined to save the company.
Would America be better off if it just didn’t have hedge funds?
I think we’d be better off if we put more put more protections in, to curb what they can do, how much they pay in taxes. There’s things that we can do to empower average workers and make sure that they have the rights and benefits that they need in society and that would curb the power of big finance. Hedge fund professionals and those in finance have access to a wealth of resources. They’re very wealthy, they have elite networks, and so they have the ability to change policy in ways that pay for their work. Everyone is ultimately affected. To curb this type of inequality, it is important that we take more measures to safeguard the interests and well-being of all.
How do you feel about retail investors that are rescuing stocks such as AMC and GameStop in an effort to protect short-sellers, citing 2008 for their anger at hedge fund managers?
The Robin Hood movement to dedemocratize finance to increase democracy is my main opinion. Capitalism and the stock exchange aren’t democratic. There’s just too much money held by the hedge funds, by the big banks, by the institutional players. And so there’s no way that the other people getting into the stock market is actually going to end up in their favor. Hedge funds can invest in ways that could completely change the stock price. And ultimately that everyday investor who invests in a few stocks—I think that’s great in theory, I just don’t see it as an avenue for addressing inequality.
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You talk in the book about the stark contrast between the Gilded Age when people who inherit money lived extravagant lives. Is it that today’s hedge fund managers are still into wealth but also draw more of their satisfaction from seeing their model work?
Absolutely. They think of it as hypothetical money. It’s hypothetical money. It’s all electronic. It was surprising to me how many academics were involved in financial and hedge fund management. I’d say about a third of the people I interviewed came from academia. Other were lawyers. They all said that funding was the reason they got into finance. A man who I knew had previously worked for NASA and was then denied funding. Others talked about how they didn’t make enough money in government research jobs or in universities; they were talking about entry level salaries in the $20,000 to $40,000 range when they started, and that they had student loan debts. We don’t need to pay researchers like hedge fund managers, but if we had a system that provided more funding to support research in another in a number of capacities, it may help to make sure those those paths are livable for more people, especially those who are most likely to be indebted and have other commitments.
A hedge fund was your job for some time. People might say that this book is sour grapes because you couldn’t cut it. You would like to answer?
I kind of stumbled into hedge funds to be honest; it wasn’t something I planned to do. As a child, I wanted to be a doctor and social scientist. However, I was looking for a job in data analysis to be able do this type of research. So I stumbled upon the hedge fund unit, and worked there almost three years in the financial crisis. It really piqued interest for me in the relation between finance, society, and inequality. My colleagues were wonderful. I’ve stayed in touch with them.