Robust defence of industry seen as adding value to society

“Are hedge funds socially irresponsible?”

Demonised and misunderstood by a wide range of people, including politicans, the hedge fund community has taken a great deal of abuse in 2008 and 2009. Blamed for the financial crisis, manipulating markets and using shorting to destroy the banking system, all that was left was to blame swine flu on the industry and the hate factor would have leapt even higher.
The industry, however, is not taking the abuse lying down. The ‘secretive’ funds are standing up to defend an industry they believe adds value not only to the markets but to the societies in which they operate.
Despite political and social attacks on hedge funds, it appears investors are voting with their bank accounts and putting cash back into the industry. Recent surveys indicate that most institutional investors intend to increase allocations to the industry.
While some illinformed remain in positions that could potentially harm the industry, it is unlikely an industry known for its innovation and entrepreneurial spirit will not be able to turn the situation to its own advantage.

Simon Ruddick, Albourne Partners
I have found myself being asked twice in two days whether what we do in the hedge fund industry is socially responsible. As questions go this reminds me a little of “Do you renounce Satan and all his works?” Just answering “yes thanks” fails to convey the fraught sense of righteous indignation at being asked the question. Heaven help you, however, if you fall into the trap of actually trying to justify your answer. Of course one is aching to explain how helping making markets efficient nurtures economic growth, which is itself an unchallengable ‘social good’ because, if nothing else, it could always be used to negate ‘socially harmful’ economic growth. Then it dawns on you that this will simply be deemed to be proof-positive that you are an incorrigible unreformed financial ‘Anglo Saxon’ and, ergo, a moral neanderthal. I suspect the last time public debate was quite this rounded coincided with the populisation of the ducking stool as a method for quizzing suspect witches. I will revert to a simple “yes thanks” and by way of return will ask anyone who is asking whether they have stopped beating their partner. In mood with the times, I will only accept a ‘yes’ or ‘no’ answer.

Antonio Borges, Hedge Fund Standards Board
Hedge funds exist for the sole purpose of providing a higher return on capital for investors. They operate under a strict discipline given that investors are quite ruthless in withdrawing their money if funds do not deliver a good performance net of fees. Given that most of the capital invested comes from institutional investors, including pension funds, insurance companies, university endowments and the like, it is hard to accept this objective is not socially valuable. In any economy, capital is a scarce resource: it should not be wasted. This means those who employ the capital investors make available should meet high standards of performance. Hedge funds help set those high standards. To outperform, hedge funds have to be innovative and constantly experiment with new strategies. Often these do not succeed; sometimes they do well. Much of the innovation hedge funds generate is due to new funds that emerge under this trial-and-error approach. The innovative nature of the industry represents a perfect model of dynamism, with considerable benefits for the whole financial system.

Geoff Cook, Jersey Finance
The role of hedge funds has become a central focus for blame when discussing the causes of the worst financial crisis and recession since the 1930s. The regulatory authorities around the world are looking at all forms of risk, particularly on a scale that could pose systemic risk and given that the global market for alternative funds is valued at $1.3 trillion, it is perhaps no surprise that hedge funds and the alternative sector should have come under close scrutiny. They have become an easy target for politicians seeking scapegoats for the crisis. However, leading and respected figures in the regulatory world have concluded that hedge funds were not central to the crisis. Within a properly regulated environment, hedge funds have an effective role to play in global finance and add value to our economies. Hedge funds have, in fact, been shown to provide liquidity and improve price information, promoting investment in business in ways that can support the economic recovery we are all working for, as well as helping facilitate the free market that the G20 summit has outlined as being essential for restoring global growth.

Ian Morley, Corazon Capital
The short answer is ‘no’. The object of hedge funds is to make money for their investors by reducing the risk of directional investment. If you regard better risk-adjusted investment that may benefit pensioners, charities, socially responsible trusts and organisations as socially responsible, then indirectly hedge funds can tick this box. Hedge fund managers may give some gains to socially responsible causes; however, this is to miss the point. They may wish to be socially responsible and include strong corporate governance and philanthropy in their structures. They may try and avoid socially irresponsible investments. This is mostly a good effect but not their raison d’être. Critics believe, wrongly, that shorting is probably unethical and should be illegal. I refute this. The uncontrolled rise of markets to a point of unsustainable levels is socially irresponsible because the resulting fall wipes out more wealth than any shorting has ever done. What is socially irresponsible is CEOs pushing up the stock price when they know it has no connection with the real profit of the business. Hedge funds are socially responsible for bursting those bubbles. That is why so many CEOs of public companies do not like us.

Peter O’Dwyer, Trinity Fund Administration
The question is of course politically loaded. It reminds me of that old fallback of every lazy hack: “When did you stop beating your wife?” When the interviewee responds, “I never beat my wife”, the paper can publish “Famous celebrity denies beating his wife” and another tabloid deadline is met. “Hedge funds deny being socially irresponsible” – that will do nicely! Poul Nyrup Rasmussen, the self proclaimed anti-hedge jihadist, stated: “There are those who said hedge funds did not cause the crisis. But the crisis is most definitely the result of excessive debt. In a sense all credit-creating vehicles including hedge funds and private equity – all of them were in the same boat.” It is clear for Rasmussen if a man has two legs and a woman has two legs a man is a woman and vice versa. Until political and newborn regulatory commentators start seriously looking at the various elephants in the room – over-extended banks (up to 78 times leveraged as against a hedge fund average of 1.4), out-of-touch regulators and incompetent governments – and stop attacking the convenient hedge fund scapegoat (none of which has received one cent of a bail out from any taxpayer), we cannot make progress.

Roger Nightingale, economist
After the catastrophe comes the witch-hunt. The justification is partly moral and partly cathartic. Sadly, it is usually government ministers who orchestrate proceedings. Not always unbiased, they tend to notice the mote in the eye of others but ignore the log in their own. They certainly overlooked their own culpability in this crisis and were equally dismissive of the failings of regulators and central bankers. They focused instead on private-sector financial services, a long-time thorn in their flesh. When an opportunity to retaliate presented itself, they grabbed it. Commercial banks and hedge funds were pilloried. It was easy enough to demonstrate that the former were childishly incompetent. But that was old news. If a toddler should be allowed to play with matches, the culpability is not the child’s but the parent’s. What of hedge funds? Irritatingly, they would come serenely through the crisis. They alone had been (somewhat) aware of the dangers; they alone had acted (somewhat) to minimise the risks. If only the authorities had been as prescient. Bottom line: it is not hedge funds that are socially irresponsible, but government ministers, regulators and central bankers.

C Mead Welles, Octagon Asset Management
Social responsibility is a personal thing. The pattern of socially responsible behaviour in the hedge fund industry is slightly different from other industries in that it ebbs and flows with success. Gifting is directly correlated to track records and assets under management. Giving money away goes against the grain of what every hedge fund manager is taught. Despite this, if one were to plot the social behaviour of the hedge fund community on a chart with the level of contribution on the vertical axis and degree of social responsibility on the horizontal access, I believe you would see a distribution profile that is remarkably different than an average bell curve. Experience has shown the curve not only starts at a much higher point on the vertical axis (the level of giving is much higher than average across the board), but the curve actually looks more like a hockey stick pointing up. Those that make a lot truly give a lot. Whether it is social responsibility, character, benevolence, maturity or just plan old ego and machismo, at the end of the day it all trickles down to those in need and that is what counts. Is that socially responsible? I think even President Obama would have to say so.

John Budzyna, Hedge Funds Care
Hedge funds are extraordinarily generous and philanthropic, giving back to the community in so many ways. One of the objectives in founding Hedge Funds Care (HFC) was to demonstrate first-hand the industry’s generosity, as well as build a philanthropic conduit for those industry professionals who wanted to “get involved” and “make a difference” in their local communities. HFC is exhibit A. This is not just a singular effort; industry professionals in the Cayman Islands, London and in the US are also working tirelessly to raise funds and awareness in their cities. This year, clearly an extremely challenging time for the industry, we have nonetheless already raised over $2.8 million for child abuse programmes. Over the 10 years that HFC has been in existence, it has raised enough money from the industry to give out $20 million in grants throughout the world. Numerous other charities rely heavily on hedge fund support. Many hedge funds are so generous they have established separate foundations to distribute funds to a broad range of causes. The philanthropic generosity of the hedge fund industry has been outstanding and continues to reach new heights.

Peter Fusaro, Energy Hedge Fund Centre
Hedge funds do indeed pursue socially responsible investment strategies in the green energy and environmental sectors. While there has been vigorous debate within the socially responsible investment (SRI) community in the past on the metrics of SRI, these are changing in the environmental sector. There is a recognition that sustainable investment must also mean sustainable returns. Green hedge fund strategies involved in natural resources such as carbon, renewable energy, etc all meet socially responsible investment criteria, as do FoHF strategies following a green investment strategy. Hedge funds are an important part of the socially responsible green and environmental investment sector. Today, the Energy Hedge Fund Center is tracking over 100 green hedge funds and FoHFs Global climate change is growing as a risk and as investment theme. We expect to see a proliferation of green hedge fund strategies in coming years. There is a new investment theme emerging which is rooted in the idea that “doing good is good for business.” Hedge funds are playing a role in this movement. It is a myth that all hedge funds act in a socially irresponsible way.