DETROIT — The ever-increasing focus on social and environmental causes is attracting a segment of the hedge fund industry to a movement that is considered by some to be the ultimate test of socially conscious investing.
The exact size of the socially conscious movement within the $1.3 trillion industry is difficult to gauge. But according to some estimates, there are at least three dozen individual hedge funds already applying environmental and social screens to the investment process.
The socially conscious movement within alternative-investment circles so far has been relatively subtle, but that hasn’t stopped some critics from challenging the notion of making the pursuit of alpha even more rigorous by screening out certain stocks and sectors.
“It gives the money managers one less oar in the water, and they won’t be able to compete with funds that aren’t so limited,” said Damian Handzy, chief executive of Investor Analytics LLC in New York.
Despite whatever challenges lie ahead for socially and environmentally sensitive hedge fund strategies, there is little doubt about the potential effect that the hedge fund industry and its deep-pocketed investors might have on social and environmental campaigns.
“The idea is to marry the ecology with the economics, and we’re seeing more and more people looking at this space,” said Braxton Glasgow, executive vice president of Kenmar Global Investment Management LLC in Rye Brook, N.Y.
Kenmar, which already manages multiple funds of hedge funds and has $3.6 billion under management, next month will launch a fund of funds comprising socially conscious and eco-friendly underlying hedge funds.
The strategy, which will allocate assets to about 30 hedge funds, is targeting the growing appetite of institutional investors that have mandates requiring them to consider environmental and other social causes, Mr. Glasgow said.
“Why wouldn’t you want to invest in something that’s good for ecology if you can also make money?” he asked.
Much like in the mutual fund industry, where socially conscious strategies have a more established history, the skeptics point to any screens as potentially getting in the way of investment performance.
“The function of a hedge fund is to create alpha, and anything that gets in the way of that is unwanted,” said Phillip Goldstein, a manager of Opportunity Partners LP, a hedge fund based in Pleasantville, N.Y. “It sounds like a marketing gimmick, and I don’t know that any individuals would invest in something like that.”
Proponents of the strategies claim that the sweeping environmental movement is creating real investment opportunities.
“To put socially responsible investing strategies inside a hedge fund is the highest-octane socially responsible investment out there,” said John DeSantis, president of Civic
Capital Group LLC, a Boston-based firm that has managed a socially conscious hedge fund for four years. “For those true believers, [such investing] is the ultimate opportunity.”
In his socially conscious long-short Civic Capital Fund, Mr. DeSantis begins by identifying social and environmental issues, and then finds companies that are making progress at addressing them.
Color Kinetics Inc. (CLRK), a Boston-based developer of light-emitting-diode technology, is one of Mr. DeSantis’ long positions because of the company’s work in trying to design more-efficient sources of light.
“All of my examples start with a problem in society,” he said.
Even as some investors and hedge fund managers acknowledge the perception that social and environmental screens can place a drag on performance, the investor appetite for such strategies is growing, according to Bill Mills, managing partner at Highland Associates Inc. in Birmingham, Ala.
Responding to investor demand, Highland in September is converting its three-year-old Good Steward Fund, a fund of hedge funds allocated in accordance with traditional Catholic values, into a portfolio that will include socially and environmentally conscious hedge funds.
“We’re hearing from investors and following the direction toward more socially responsible investing,” Mr. Mills said. “I believe this movement is only going to grow, and we’ll see some very unique products and applications, especially in the alternatives space.”
Considering the tendency of some hedge fund strategies sometimes to use large investments as leverage to influence corporate boards, there could be some credence to the idea of hedge funds’ having a similar effect with regard to social and environmental issues.
“Hedge funds have already proven they can flex their muscles politically, so why shouldn’t they be able to flex their muscles socially?” said Tom Westle, a partner and hedge fund attorney with Philadelphia-based Blank Rome LLP. He said he already knows that at least one of his clients is planning to jump on the bandwagon by launching a socially conscious hedge fund.
“It makes good sense for our survival, and it makes good sense as an investment, which is why I really think it has a chance of catching on,” Mr. Westle said.
Meanwhile, the notion of money-grubbing hedge fund managers’ suddenly trying to save the planet is a bit incongruous, some observers noted.
“Isn’t the idea of a socially responsible hedge fund an oxymoron?” quipped Lee Schultheis, founder of Alternative Investment Partners LLC, a White Plains, N.Y.-based firm that allocates assets to hedge fund strategies. “I don’t think there’s a value in constraining oneself to green investments.”
Mr. DeSantis has a slightly different perspective. “To a lot of the hedge fund industry, this strategy is boring and not aggressive enough,” he said. “And on the socially responsible side, they still think I’m some kind of carpetbagger who isn’t really passionate.”
