SRI Funds See Growth, But Face Fundraising Challenges

Nov 3 2006 | 2:29pm ET

 by Kate McGregor 

Let’s face it: Most hedge fund managers consider themselves ahead of the curve. But these days, no one is more au courant than the handful of socially responsible and green hedge funds, which seem to be taking their investment strategies straight from the headlines. Hedge funds, it seems, are finally realizing that green really is green.

Boston-based Winslow Management Company, known for the Winslow Green Growth Fund, its green-focused mutual fund, tested a leveraged long/short equity hedge fund in 2001. The Winslow Hedge Fund has achieved double-digit returns over the five years since and is up a “shade under double digits” for the current year. The firm is now embarking on an aggressive marketing push, said Nicolé Keane, director of client relations.

"It took a five-year cocoon phase but now we're on an aggressive marketing push to build the fund," she said. This phase involved tweaking the strategy a bit. Initially, the fund was long-term in its short and long strategy, keeping securities in the portfolio for between 12 and 18 months. While its long strategy remains unchanged, the fund changes the securities it shorts as much as several times a quarter.

Once limited to the family and friends of fund managers and “SRI people,” Keane says the fund is now garnering interest from “people looking for the next big wave of opportunity.” The Winslow fund currently has roughly $30 million in assets.

Indeed, among the 500-plus attendees at the SRI On The Rockies conference held in Colorado Springs, Colo., this past weekend, roughly 240 were first-timers. “The field is still kind of niche,” said John Desantis, a conference regular and a founding partner of Civil Capital Group. “But we’re now at the point where people are starting to catch on.”

Three years ago, the Boston-based firm launched the Civic Capital Group Fund I, a conservative long/short hedge fund that invests in companies that address social problems, such as water, energy and nutrition.

While similar in structure, the Civic Capital Fund and The Winslow Hedge Fund have very different philosophies. As Winslow’s history and name suggest, it is a green fund that invests in small cap companies that “are proactively solving an environmental issue or produces a technology that solves an environmental issue,” with green energy and alternative energy technology a large part of the fund’s long portfolio, Keane said.

Meanwhile, Civic Capital invests in Standard & Poor’s 500 companies dedicated to solving social issues such as obesity and helping empower the poor, as well as environmental issues such as water purification and alternative energy.

As value hedge funds, Civic Capital and Winslow represent the two most prominent SRI investment philosophies: ecology and social responsibility. And while there are a handful of funds that fall in between, including the four SRI funds for Green Cay Asset Management, the number of SRI funds, excluding those that are faith-based remains in the single digits.

These few, however, prove that SRI can be profitable, to a degree–none of the funds has surpassed the $100 million mark. Unfortunately, not all fund managers have been so lucky. Eco-vest Advisors, an asset management firm, announced this summer it was preparing to launch a green fund, The Terra Verde Fund, sometime later this year (FINalternatives 6/3/06). The SRI fund was to be based on rankings provided by Innovest Strategic Value Advisors. According to Peter Wilkes, managing director of Innovest, the firm was unable to raise the necessary funds and has killed its plans for the fund. Repeated calls to Eco-Vest and its founder Peter Lusk were not returned by press time.

Civic Capital CFO Phil Matyi admits there are several obstacles in fund raising in the SRI space. For instance, because SRI funds do not have a long track record, many advisors steer investors toward funds of funds, adding to the challenge pure SRI hedge funds face. “Many investors start off with funds of funds because advisors tell them that SRIs are not a good idea,” Matyi said. Also, many institutional investors think that SRI sacrifices opportunity and return.

“The initial step is hard,” continued Matyi. “There are all of these markets and each one has a set of counterbalancing reasons for not doing this right now. The challenge is to break through the barrier and convince [investors] that intellectually this is a good idea.”

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