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Responsible Hedge Funds
[Role of managerial incentives and discretion in hedge fund performance]

Author

Listed:
  • Hao Liang
  • Lin Sun
  • Melvyn Teo

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.

Suggested Citation

  • Hao Liang & Lin Sun & Melvyn Teo, 2022. "Responsible Hedge Funds [Role of managerial incentives and discretion in hedge fund performance]," Review of Finance, European Finance Association, vol. 26(6), pages 1585-1633.
    • Handle: RePEc:oup:revfin:v:26:y:2022:i:6:p:1585-1633.
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    1. Richard Bofinger & Simon Cornée & Ariane Szafarz, 2024. "When in Rome, Do as the Romans Do: Disclosure Regulation and ESG Fund Management by Social and Conventional Banks," Working Papers CEB 24-003, ULB -- Universite Libre de Bruxelles.
    2. Zhang, Ning & Zhang, Yue & Zong, Zhe, 2023. "Fund ESG performance and downside risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 86(C).
    3. Liliana Rivera & Norma Ortiz & Gabriel Moreno & Iliana Páez-Gabriunas, 2023. "The Effect of Company Ownership on the Environmental Practices in the Supply Chain: An Empirical Approach," Sustainability, MDPI, vol. 15(16), pages 1-24, August.
    4. Hu, Xinwen & Hua, Renhai & Liu, Qingfu & Wang, Chuanjie, 2023. "The green fog: Environmental rating disagreement and corporate greenwashing," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).

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    More about this item

    Keywords

    Responsible investing; ESG; Agency problems; Incentive alignment; Greenwashing; Hedge funds; Sustainable finance; Stewardship; Principles for Responsible Investment;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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