The Disappointing Record of Socially Responsible Hedge Funds

New research shows that hedge funds that proclaim to adhere to socially responsible investment principles fail to follow through on that commitment and they deliver inferior performance results. The same is true of institutional funds in general, although the evidence is weaker.

Hedge funds collectively manage about $3 trillion and form an integral part of the portfolios of pension funds, sovereign wealth funds and university endowments, many of which have embraced socially responsible investing (SRI). For investment managers, a way to signal one’s commitment to responsible investment is to sign the United Nations Principles for Responsible Investment (PRI). Attesting to the spectacular growth in investor interest in responsible investment, assets under management of PRI signatories has grown from $6.5 trillion in 2006 to $86.3 trillion in 2019.

PRI signatories are expected to adhere to the following six principles:

  • Incorporate environmental, social and governance (ESG) issues into investment analysis and decision-making processes.
  • Be active owners and incorporate ESG issues into ownership policies and practices.
  • Seek appropriate disclosure on ESG issues by the entities in which they invest.
  • Promote acceptance and implementation of the principles within the investment industry.
  • Work together to enhance effectiveness in implementing the principles.
  • Report their activities and progress towards implementing the principles.