Responsible Hedge Funds. (9th May 2022)

• Record Type: Journal Article
• Authors: Liang, Hao; Sun, Lin; Teo, Melvyn
• Is Part Of: Review of finance. Volume 26:Number 6(2022)
• Page Start: 1585
• Page End: 1633
• Publication Date: 2022-05-09
• Subjects: Responsible investing -- ESG -- Agency problems -- Incentive alignment -- Greenwashing -- Hedge funds -- Sustainable finance -- Stewardship -- Principles for Responsible Investment; G23 -- Q56; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfac028
• Languages: English
• ISSNs: 1572-3097

Abstract

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 is driven by PRI signatories with low environmental, social, and governance (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.