Tuesday, 27 January 2015
Last updated 9 hours ago
Mar 10 2006 | 12:00am ET
By Deirdre Brennan
Investors looking to place their money in socially responsible investment (SRI) vehicles have traditionally gone the mutual fund route, but now investors have more choices, specifically, SRI hedge funds. “There does seem to be increasing demand,” said Matthew Patsky, partner and portfolio manager at Winslow Management Company, one of a handful of investment firms offering an SRI hedge fund product.
The firm’s “green” hedge fund, which was launched in February 2001 but has been relatively unknown until now, accounts for $27 million of the firm’s $320 million in assets under management. Two weeks ago the firm placed a brief paragraph on its Web site stating that it had an SRI hedge fund and already it has begun to receive calls from interested investors.
“We have a five-year track record, so we feel that it is the right time to start sharing information about the product,” said Patsky.
According to a source close to the firm, the track record for Winslow’s SRI hedge fund is impressive. In the last three years the fund has had an annualized return of 47.8%. As for recent performance, the firm has returned 16.25% in the first two months of this year.
Despite the “green” bent to Winslow’s hedge fund, the firm is not limited to investing in certain sectors. Rather, the firm invests in companies that have policies and technologies aimed at bettering the environment, or at least lessening their impact on it. For example, in 2004 the fund invested in Chiquita, which is involved in agriculture, an industry that Patsky called “inherently dirty.” However, Patsky said Chiquita has made strides to use safer pesticides and also abides by strict corporate governance standards, so he felt comfortable investing in the banana producer. Patsky said the firm did well in the investment in 2004, but no longer holds Chiquita shares.
One Out of Ten…What Is Driving It?
Ten percent of all professionally managed investments are going toward firms or funds that employ some type of socially responsible investing criteria—including SRI screens, shareholder advocacy and community investing—according to a recent report by the Social Investment Forum.
Ed Stavetski, portfolio manager for Safe Haven Investment Portfolio, a long/short hedge fund offered by Benchmark Asset Managers, said some of the driving forces for demand for this type of product are pension funds and endowments that may have specific investment requirements. This makes it difficult for them to invest in traditional hedge funds, yet they need to increase returns in order to meet obligations.
“Endowments have set spending rules and they went through a tough environment recently,” said Stavetski. “Over the next five years or so you are going to have low single-digit stock returns and the only way you can increase the return is to diversify across asset classes.”
The Safe Haven fund was launched in 2004 and does not invest in alcohol or tobacco. “We do a bottom-up type of thing. We look at companies first and then look at social screens,” he said. The firm also evaluates how companies treat their employees, including their activities offshore and whether they employ child labor.
While Stavetski aims to put together a strong SRI portfolio, he is still focused on seeking strong returns and thinks that an SRI hedge fund can perform equally as well as its non-SRI counterparts. “We aim for an acceptable portfolio and also an acceptable return,” he said.
Net Good or Net Evil?
Dover Management is another firm that offers an absolute return product. In May 2005 the firm launched the Dover Long/Short Fund, which at any given time takes long positions in around 20-25 companies and short positions in 10-15 others.
“We are long the cheapest, most responsible companies and we are short the companies that are really expensive and lack a lot of the best qualities of responsibility,” said Christopher Wolfe, who manages the portfolio for Dover.
Unlike the Safe Haven fund, Dover does not screen out any companies; rather it looks at a firm’s corporate social responsibility, including tangible, quantifiable results. “We wanted to have metrics that were easily understandable, transparent and linked to the financial statements,” Wolfe said. “What that means is that we look at corporate philanthropy, because that’s a cash flow item so that says something to us about free cash flow.”
Dover, which was founded in 2001 by Rick Fuscone, a former executive chairman for the Americas for Merrill Lynch, also has a long-only SRI offering.
“Rick founded the firm on the premise that companies that take care of their communities are stakeholders, and they should outperform over time, which is what he saw in his experience,” Wolfe said. “We tested this theory for a few years, and found it to be true.”
The firm decided to launch the hedge fund along with its mutual fund because, “We thought that the marketplace would look at this over time as being a valuable way to generate incremental and excess returns,” Wolfe said. “My assumption was that we would see a lot more demand from high-net-worth individuals, but we are seeing more interest from institutions.”
The hedge fund currently has less than $10 million in assets under management, but it has the capacity to take in up to $500 million. The fund charges 1% for management and 20% for performance, and there is a six-month lockup.
While investors seek a wide variety of socially responsible funds depending on their goals or beliefs, Wolfe alludes to the positive spirit behind all of these funds by wondering how the founders of Google would answer the following question: “One thing I want to ask Google is ‘do you do no gross evil or no net evil?’” he chuckled.
Jan 23 2015 | 1:00pm ET
In our new section, FINtech Focus, we will profile one of these firms each week. While fintech is a broad category, we will be focusing on firms that specifically cater to the alternative investment industry. Read more…