Hedge Funds and Impact Investing: Considerations for Institutional Investors

Abstract

Impact investing has grown rapidly over the last 10 years, in terms of both investment options and dollars invested. Much of this growth is attributed to the evolution from screening to proactive approaches. Many institutional investors are realizing that along with the social benefit, impact investing can be additive to returns, and they are looking for ways to incorporate this trend. Impact investing options are available in all asset classes, but the adoption rate within the hedge fund community has lagged all the others. This article focuses on three possible reasons for this: hedge fund strategies primarily rely on alpha for returns, possible time horizon mismatch between shorter term focused hedge funds and sustainability trends, and the below-market-return stigma associated with historical SRI investing. The article identifies strategies in which these obstacles may not apply and provides suggestions for ways institutional investors can engage with their hedge fund managers and incorporate these strategies into their hedge fund allocation.