African American Owned Hedge Funds You Must Know About

William Huston, AIF®, AIFA®

by in Published on April 27, 2022

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African American Owned Hedge Funds You Must Know About

The numbers are in, and they are gut-wrenching.

The latest data from the U.S. Securities and Exchange Commission (SEC) revealed that African Americans own a mere 8.9% of hedge fund firms in the U.S.

Could it be coz there haven't been significant positions for Black folk in the financial sector? After all, most hedge fund founders and managers started in the financial industry.

Or, maybe due to a diverse poor culture in the industry.

George Floyd's murder in 2020 shed light on the sad reality of a few Black-owned hedge funds. Top Black managers from banks and equity companies aired their concerns. Sadly, the hedge fund corner had limited representation.

Nevertheless, few African American hedge funds are beavering to change the statistics and leave a black legacy.

What Is a Hedge Fund?

A hedge fund is an active and often aggressively managed fund that pools investor finances to invest and earn super-normal profits.

A hedge fund derives its name from the institution's ability to minimize – hedge – high risks in investments while making insanely high profits.

Regulations aren't strict on hedge funds, unlike other funds such as ETFs or Mutual funds, hence the high-risk investments techniques, such as short sales, money lock-up, derivatives, and leveraging. While the law doesn't mandate the funds to register under the Securities Act of 1933 and the Investment Company Act of 1940, it limits access to accredited investors, such as high net worth investors and institutional investors. Furthermore, these institutions and the portfolio managers fall under several statutes:

The Commodity Futures Trading Commission

The 1922 Commodity Exchange Act

Dodd-Frank Wall Street Reform Act of 2010

Financial Stability Oversight Council

These institutions manage assets worth millions, with the latest numbers showing the total assets under management (AUM) hit a record-breaking $3.8 trillion as of 2021. In most cases, the managers receive an annual management fee of 2% of the fund's net asset value and a management fee (mostly 20% of the net asset value's yearly increase).

Hedge Funds Types and Strategies

These are strategies that hedge funds utilize to earn profits for accredited investors. While each hedge fund is unique, they use similar techniques.

Generally, these strategies can be categorized into:

  • Directional Strategies

This strategy exploits market (short and long) inconsistencies, movements, and trends when choosing the ideal stocks for investing.

A portfolio manager can use plain old identification skills or computer models to gain a broad market perspective to choose ideal investment options.

  • Event-Driven Strategies

Involves a fund purchasing the debts (mostly senior debts) of businesses that have filed for bankruptcy or are in financial jeopardy.

In most cases, the portfolio manager uses this strategy when the economy is healthy, and there are numerous corporate activities, such as mergers, acquisitions, and restructuring.

  • Fund of Funds Strategies

It involves investing in other types of funds instead of securities such as stocks and bonds, naming a few.

As the name suggests, this fund's portfolio consists of a collection of portfolios of various funds.

  • Macro Strategies

An investment strategy that relies on various nations' prevailing political and economic climate. Portfolio managers act on insights from macroeconomics analysis and how they affect commodities, equities, currencies, and interest rates.

The manager will settle in the asset class best suited for their views.

  • This strategy exploits the mispricing of related or similar securities or benchmarks. The portfolio manager relies on analysis to identify undervalued and overvalued assets and purchase or dispose of them accordingly.

The manager takes a short position in the overvalued asset and a long position in the undervalued asset expecting them to return to their fundamental value.Relative Value/Arbitrage Strategies

  • Risk Parity Strategies

This strategy is an excellent alternative to the traditional portfolio consisting of 60% stocks and 40% bonds or other fixed income. The stocks section of the conventional portfolio carries a 90% risk.

Risk parity equalizes this risk by investing more broadly and maximizing profits through financial leveraging.

  • Blockchain Strategies

Blockchain funds invest in buying and selling cryptocurrencies. Additionally, they deal in crypto securities, private equity, and venture capital for startups dealing with cryptocurrencies.

This investment area is young, with only $4 billion in assets under management as of 2022.

Responsibilities of African American-Owned Funds

Black-owned hedge funds have an active role from corporate and social to financial responsibilities. Their responsibilities go beyond taking care of their investors and making profits.

These firms are in charge of:

  • Boosting diversity and inclusion in the industry by employing the millions of unemployed but qualified black folk and other minority groups in the country.
  • Managing more, be more prominent and more significant. A Knight Foundation report indicated that minority-owned firms handle a meager 1.4% of assets under management. It's up to these hedge funds to prove they can take more than 1.4%, especially with the hundreds of billions at their disposal!
  • Invest in exceptional growth companies (EGC) that have the potential to make impressive returns but cannot do so.
  • Drive the wheels of the economy by providing employment, investment, and other crucial opportunities.
  • Corporate responsibilities by giving to charitable organizations and nonprofits to benefit marginalized communities.
  • Provide retirement security. Investors invest when they are young, so they can have a sturdy and comfortable blanket to cushion them when they retire. Additionally, U.S pension schemes invest billions in hedge funds securing retirement for various workers, such as teachers, and firefighters, to name a few.
  • Cater for education. Hedge funds are a great source of education foundations, endowments, and scholarships made possible by the billions educational institutions invest in.

Top African American-Owned Hedge Funds and Asset Management Firms

Unbelievably, even credible online business sources, from Forbes to Business Insider, rarely mention African American-owned hedge funds in their lists! Let's take a look-see at the black firms making headways in terms of managing assets:

BLK Capital Management Corp

BLK Capital is a 100% African American-owned non-profit hedge fund. Three students from Princeton and Harvard Universities founded the firm in 2017.

The fund aims to change the scene in the financial sector by educating black students on the numerous investment possibilities. The fund even has a scholarship program - the Onuoha fellowship – to cater to black students who portray academic excellence, leadership qualities, and a thirst to change the world with groundbreaking entrepreneurial ideas.

Brown Capital Management

Founded in 1983, Brown Capital is the second oldest black-owned asset management firm in the U.S.

As of Dec 2021, the firm had over $17.5 billion in assets under management, split between separately managed accounts and mutual funds. Brown Capital, which is 100% employee-owned, seeks and invests in exceptional growth companies (EGC) with the potential for impressive returns.

Ariel Investments

With over $18 billion in assets under management as of December 2021, Ariel Investments is America's largest black-owned asset management firm. It has attained this immense wealth and presence through its nine separate account strategies and five mutual funds since its inception in 1983.

The 95.6% employee and board-owned fund recently launched Ariel Alternative, a private asset management firm to assist black businesses to scale.

Piedmont Investment Advisors

Piedmont was founded in 2000 to offer minority and woman-owned enterprises institutional finance management through equity and income fixed management.

Philadelphia-based FIS Group acquired the firm in 2018. The latest reports indicate the merger created $10 billion in assets under management.

Channing Capital Management

Channing Capital is headquartered in Chicago, Ill, and serves institutional investors. The firm is among the nation's largest black funds. It has more than $3.6 billion in assets under management (as of December 2021) since its inception in 2003.

In July 2021, the firm hit a milestone after launching its first publicly traded mutual fund, the Channing Intrinsic Value Small-Cap Fund (Ticker: OWLLX). The mutual fund boosts institutional and retail investors access to the firm's small-cap strategy and strengthens its presence in the asset management and investment sector.

StoneRidge PMG Advisors

StoneRidge Advisors is among the nation's prominent minority-owned fixed asset management companies.

It focuses on an active fixed-income portfolio and a combination of top-down and bottom-up investment approaches. Since its foundation in 1996, the Pennsylvania-based firm has gained more than $1.5 billion in assets under management.

Attucks Asset Management, LLC

Attucks Asset Management is a fund whose mission is to discover and engage emerging managers and develop customized solutions that deliver alpha.

The firm was founded in 2001, and it's headquartered in Chicago, Ill. As of March 2021, this investment advisor had accumulated over $2 billion in assets in management. The firm develops various investment solutions in collaboration with minority, woman-owned, and emerging investment managers.

Vista Equity Partners

Founded in 2000, Vista Equity has since accumulated more than $86 billion in assets under management.

The firm has acquired those assets by investing exclusively in enterprise software and several IPOs over its lifetime. Its operational guiding principles are empowerment, excellence, and evolution.

Earnest Partners

Earnest Partners is a fund that manages more than $28 billion of assets under management.

It was founded in 1998 and headquartered in Atlanta, Georgia. Its 87% owned by Westchester Limited, LLC and 13% by EP Partner Pool, LLC.

The firm manages various portfolios ranging from charitable organizations, municipalities, state funds, corporations, endowments, Taft-Hartley plans, to universities.

The founder, Paul E. Viera, developed the Return Pattern RecognitionⓇ. This revolutionary technique identifies a company's market and financial features at the time of producing impressive results.

Advent Capital Management, LLC

With over $11 billion in assets under management, Advent Capital manages a diversified portfolio consisting of long-only funds, hedge funds, and closed-end mutual funds listed on the NYSE.

This registered investment advisor provides superior investment performance, owing to its cocktail of credit analysis and equity research.

Founded in 1995, the NewYork-based firm has a unique bottom-up technique that focuses on balance sheet analysis, cash flows and interest coverage.

Bay Street Capital Holdings

Bay Street Capital Holdings is an independent investment advisory, wealth management, and financial planning firm headquartered in Palo Alto, CA. They manage portfolios with the goal of maintaining and increasing total assets and income with a high priority on managing total risk and volatility. Although many advisors may focus on maximizing returns, they place a higher priority on managing total risk and volatility.

Our founder, William Huston founded Bay Street after 13 years of supporting the United States' largest retirement plan ($650B) Thrift Savings Plan. He is recognized as Investopedia’s Top 100 Financial Advisors for 2021. In California, only two black-owned firms out of nineteen firms received this recognition. In Scottsdale Arizona, Ekenna Anya-Gafu CFP, AAMS is recognized among the Best Financial Advisors for his responsiveness, friendliness, helpfulness, and detail. Bay Street was founded to advocate for diverse and emerging fund managers and entrepreneurs. In 2021, Bay Street was selected as a finalist out of over 900 firms across the US in the category of Asset Manager for Corporate Social Responsibility (CSR).

Sources

https://www.sec.gov/files/amac-background-2018-diverse-asset-management.pdf

https://www.sec.gov/files/ib_hedgefunds.pdf

https://www.valuewalk.com/global-crypto-hedge-fund-landscape-pwc/

https://www.prnewswire.com/news-releases/channing-capital-management-launches-its-first-mutual-fund-301335866.html

https://www.forbes.com/sites/sergeiklebnikov/2021/10/05/richest-hedge-fund-managers-forbes-400-list-2021/?sh=43136fb2eea4

https://knightfoundation.org/reports/knight-diversity-of-asset-managers-research-series-industry/

https://investinginopportunity.org/?gclid=Cj0KCQjw_4-SBhCgARIsAAlegrVxb4OtC_F7STo2c4xUtf2kDZhqfAeUwOtL93wm1j9VxFa_Ygse_roaAqTgEALw_wcB

https://www.businessinsider.com/ranked-the-10-biggest-hedge-funds-in-the-us-2018-5?r=US&IR=T#1-bridgewater-associates-12470-billion-aum-10

https://www.blackenterprise.com/black-asset-management-firms-manage-1-1-total-71-4-trillion-assets/

William Huston, AIF®, AIFA®
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