Future of Alternatives 2025: Why Investors Should Bank the Diversity Dividend

While investors recognize the performance benefits of diversity at fund managers, progress toward widespread implementation of formal policies will be slow

A majority of the alternative investment community recognizes that diversity of gender, experience, and cultural backgrounds in the workplace is a powerful defense against groupthink, can sharpen a team’s decision-making ability, and improves investment outcomes. However, 19% of investors surveyed for Future of Alternatives 2025 remain ambivalent about the benefits of a diverse workforce, while 22% believe that a diverse workforce makes no difference to reaching investment objectives (Fig. 1).

This may change over the next five years, though. The body of research linking diversity and inclusion to better investment outcomes is growing. A 2019 study by the International Finance Corporation based on performance data from more than 700 private equity and venture capital funds found that those with gender-balanced senior investment teams generated investment returns that were 10-20% higher than those with a majority of male or female leaders.

A study published in the Harvard Business Review found that venture capitalists tend to partner others with the same gender, race, educational background, or previous employer. But homogeneous teams have been found to have worse investment outcomes. Collaborators with diverse traits are better equipped to help portfolio companies shape their strategy to thrive in a highly uncertain competitive environment.

Recognizing the Value in Diversity
Diversity is already influencing external manager selection, with institutional investors increasingly likely to include diversity criteria in their requests for proposals. Although only 13% of investors surveyed for Future of Alternatives 2025 have a diversity policy in place for hiring investment managers in alternatives, 10% expect to implement a policy in the next 12 months and a further 21% will within five years (Fig. 2). Given that 57% of respondents see the benefits of diversity, and that the implementation of diversity policies in alternatives lags the wider portfolio, it is likely to be only a matter of time before this thinking is formalized.

Research by Preqin has shown that more than three-quarters of total assets across the alternatives industry are managed by GPs with confirmed policies in place for diversity and inclusion. In other words, the largest GPs are already anticipating that the diversity agenda will gather momentum in the years to come, and are striving to position themselves as thought-leaders in this space.

Fund Managers Open up to Inclusion
While a large majority (73%) of fund managers polled in Future of Alternatives 2025 don’t currently have a diversity policy in regards to their investment practices, 10% said they plan to adopt a policy within the next 12 months (Fig. 3). A further 19% plan to do so over the next five years. 

This level of buy-in is encouraging and not at all surprising. The investing community’s fixation with star analysts or hedge fund ‘masters of the universe’ has gradually worn away with time, with the dominant model one that places a focus on investment teams. High-functioning teams pay attention to how decisions are made and who is included in them, and this is the heart of what inclusion means – how firms harness the diversity of their workers to the maximum advantage. 

As we move toward 2025, we expect to see alternative asset managers further develop metrics to track progress and spot areas of weakness around the diversity agenda, mostly in response to investor demand. When the benefits are both seen and believed, the more progressive GPs will pay serious attention to extending formal diversity and inclusion practices across their investment portfolios.

Download a data pack containing all the charts in our regional articles for Future of Alternatives 2025. For more predictions and projections on the future of the alternatives industry, visit Preqin's Future of Alternatives 2025 Content Hub.