Responsible Hedge Funds

Abstract

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 of PRI signatories is driven by signatories with low ESG exposures and is greater for hedge funds with poor incentive alignment. By exploiting regulatory reforms that enhance stewardship, we provide causal evidence that relates agency problems to signatory underperformance. 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