Responsible Hedge Funds
Review of Finance, forthcoming
62 Pages Posted: 23 Jun 2020 Last revised: 2 May 2022
Date Written: May 26, 2020
Hedge funds that endorse the United Nations Principles for Responsible Investment (PRI) underperform other hedge funds after adjusting for risk but attract greater investor flows, accumulate more assets, and harvest greater fee revenues. Consistent with an agency explanation, the underperformance is driven by PRI signatories with low ESG exposures and is greater for hedge funds with poor incentive alignment. To address endogeneity, we exploit regulatory reforms that enhance stewardship and show that the ESG exposure and relative performance of signatory funds improve post reforms. Our findings suggest that some hedge funds endorse responsible investment to pander to investor preferences.
Keywords: Principles for Responsible Investment, Greenwash, Hedge Funds, Walk the Talk, Agency Problems, Operational Risk, ESG, Stewardship
JEL Classification: G23, Q56
Suggested Citation: Suggested Citation