Socially responsible investing (SRI) assets have been growing at a significantly faster rate than total assets under professional management, particularly among non-profit and faith-based organizations, according to the Social Investment Forum. This alternative approach points to the social and environmental consequences of investing and argues that these effects should be taken into account in making investment decisions.
The Forum estimates that SRI has increased to $2.29 trillion in 2005 from $639 billion in 1995, or nearly $1 out of every $10 under professional management in the U.S. This estimate is for a broadly defined category that includes socially screened mutual funds, shareholder advocacy, and community investing. But the largest segment is screened separate accounts, which contain more than $1.5 trillion in assets from individuals and institutions. Some of these accounts are managed by hedge funds.
Meeting the special needs of SRI is not for every manager. Who wants to have one hand tied behind their back when figuring out trades? It can also be tough negotiating such programs with managers, since separate accounts are needed to monitor the restricted securities and many managers do not want to take on the responsibility of managing a portfolio with restrictions, said Robert Discolo, head of hedge fund strategies at AIG Global Investment Group, the asset management arm of AIG.
Discolo had doubts himself. A consulting firm had approached AIG Global Investment to do this for a number of its clients; all investments needed to adhere to a certain list of rules and restrictions. What helped was the AIG group’s deep bench of managers. Discolo did not look for socially responsible funds; instead he went to hedge fund managers already in the group’s portfolios or vetted as ready for investment and asked them whether they could manage separate accounts subject to the special requirements.
The interesting question is whether managers can stay within confines defined by non-market considerations without reducing returns. In the abstract, the economic argument suggests this is unlikely. Two years later, the AIG program has $300 million in assets invested with 15 to 20 managers, and the returns on the restricted accounts are very similar to those on the non-restricted funds, said Discolo. “It worked,” he said. “The managers really embraced it, and one of them wants to replicate the separate account as a fund with the same strategy.”
Will socially responsible hedge fund investing succeed in other settings? The AIG experience suggests access to established managers may be the key to making it work. Other experienced players also are developing vehicles with environmental or social mandates. For instance, Parker Global Strategies, which runs a variety of funds of funds, plans to start two programs to allocate to funds that specialize in alternative energy and clean technology.
Jeff Joseph serves on the advisory board of HedgeWorld (www.hedgeworld.com), a global provider of hedge fund information and investment products. Chidem Kurdas is the New York Bureau Chief of HedgeWorld.
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