Responsible Hedge Funds*

Role of managerial incentives and discretion in hedge fund performance

Hao Liang, Lin Sun and Melvyn Teo

Review of Finance, 2022, vol. 26, issue 6, 1585-1633

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.

Keywords: Responsible investing; ESG; Agency problems; Incentive alignment; Greenwashing; Hedge funds; Sustainable finance; Stewardship; Principles for Responsible Investment (search for similar items in EconPapers)
JEL-codes: G23 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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