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Can hedge funds benefit from corporate social responsibility investment?

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  • Jun Duanmu
  • Qiping Huang
  • Yongjia Li
  • Garrett A. McBrayer

Abstract

We explore the extent to which hedge funds incorporate corporate social responsibility (CSR) considerations in the development of their investment strategies. Using an asset‐weighted composite measure of CSR by fund, we examine the difference in financial performance between hedge funds with high CSR investment relative to those with low CSR investment and document no significant difference. Yet, we find that hedge funds increase their exposure to high‐CSR investments over our sample period, specifically postfinancial crisis. We find that the increases in CSR investment are associated with lower return volatilities in the future. Additionally, hedge funds with higher weighted CSR scores exhibit significantly lower risk factor loadings than funds with lower weighted CSR scores. Our results suggest that hedge funds are able to derive benefits by using CSR considerations as a form of risk mitigation in their investment policies.

Suggested Citation

  • Jun Duanmu & Qiping Huang & Yongjia Li & Garrett A. McBrayer, 2021. "Can hedge funds benefit from corporate social responsibility investment?," The Financial Review, Eastern Finance Association, vol. 56(2), pages 251-278, May.
    • Handle: RePEc:bla:finrev:v:56:y:2021:i:2:p:251-278
    DOI: 10.1111/fire.12261
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    2. Huang, Qiping & Li, Yongjia & Lin, Meimei & McBrayer, Garrett A., 2022. "Natural disasters, risk salience, and corporate ESG disclosure," Journal of Corporate Finance, Elsevier, vol. 72(C).
    3. Mustafa O. Caglayan & Umut Celiker & Gokhan Sonaer, 2022. "Disagreement between hedge funds and other institutional investors and the cross‐section of expected stock returns," The Financial Review, Eastern Finance Association, vol. 57(3), pages 663-689, August.
    4. Peng, Hongfeng & Zhang, Zhenqi & Goodell, John W. & Li, Mingsheng, 2023. "Socially responsible investing: Is it for real or just for show?," International Review of Financial Analysis, Elsevier, vol. 86(C).
    5. Jonghyuk Bae & Natalya Khimich & Sungsoo Kim & Emanuel Zur, 2023. "Can Green Investments Increase Your Green? Evidence from Social Hedge Fund Activists," Journal of Business Ethics, Springer, vol. 187(4), pages 781-801, November.

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