Can Hedge Funds Benefit from CSR Investment?

Abstract

We explore the extent to which hedge funds incorporate corporate social responsibility (CSR) considerations in the development of their investment strategies. Using an asset-weighted composite measure of CSR by fund, we examine the difference in financial performance between hedge funds with high CSR investment relative to those with low investment and document no statistical difference. Yet, we find that hedge funds increase their exposure to high CSR investments over our sample period, specifically post-financial crisis. We find that the increases in CSR investment are consistent with hedge funds utilizing CSR strategies as a form of risk mitigation. Specifically, hedge funds with higher weighted CSR scores exhibit significantly lower risk factor loadings than funds with lower weighted CSR scores. Our results suggest that hedge funds are able to derive benefits by using CSR considerations as a form of risk-mitigation in their investment policies.

Keywords: Hedge funds, Corporate social responsibility, Risk taking

JEL Classification: G11, G23