Do socially responsible hedge funds performs better than their conventional peers? An empirical analysis.

Abstract

Sustainable investing is mainly driven by institutional investors, but hedge funds are still the lowest percentage among institutional implementing SRI strategies (Morgan Stanley, 2020). The AUM proliferated during the last years (GSIR, 2018; PRI 2020; US SIF, 2020) which is mainly driven by the ambitious plans of governments (EU, 2021, Refinitiv, 2020), but also of the awareness of the general public and institutional investors (AAM, 2021; ABP, 2021). However, also the hedge fund industry AUM is increasing (HFR, 2020; Barclayhedge, 2021), even if hedge funds haven’t a clear tendency to invest socially responsible (Preqin, 2019). Socially responsible investing has gained recognition in recent years, but the evidence on whether SRI positively affects investor returns is mixed. The research question of this master thesis is to investigate whether hedge funds pursuing SRI strategies are compensated with higher returns than their non-SRI counterparts. I make use of several empirical methods at the level of hedge funds, but also on companies each hedge fund is invested in. Using factor models with different risk-factors, I find evidence that SRI hedge funds do significantly outperform non-SRI hedge funds on average by 0,1% monthly from 2010 to 2020 with even stronger results in the pandemic year 2020. Moreover, SRI long/short hedge funds outperforming their conventional peers among several periods. Using FMB (1973) regressions for the 2020 year, I find similar outperformance of SRI hedge funds and after breaking down into categories I find that SRI long-only hedge funds outperform. Working with PSM technique, I find similar SRI hedge fund findings for the whole time period. After investigating the performance of company holdings of hedge funds I confirm my past return-based methodology findings. So far, literature about SRI in hedge funds is undoubtedly rare. This thesis sheds mainly light on performance differences among SRI- and non-SRI hedge funds, but also raises concerns about ESG frameworks. Investors are attributing increased importance to sustainability and quality of ESG data and SRI becomes more and more entrenched in the investment landscape. The rise of SRI in the hedge fund industry and ESG investing in general is poised to continue.