Hedge funds provide an alternative approach to managing investments. They can seem relatively complex and are therefore not always well understood. Hedge funds generally can be classified according to the following criteria:

1. They usually emphasise absolute returns- unlike equity unit trusts they are not benchmarked.
2. Hedge funds use a wide variety of tools and strategies including leverage, derivatives and short-selling.
3. Hedge funds have traditionally only been available to wealthy individuals and certain institutions.

Funds of hedge funds may make hedge funds more attractive to charities. They can provide diversified exposure to a number of different hedging strategies and reduce the risks involved in investing in a single fund.

Some people are concerned that hedge funds are not a responsible investment, on the grounds that hedge funds typically look at the short term and seek gains by exploiting market inefficiencies. As a result, for example, rather than seeking to address management inadequacies through governance they may either short the company or actively seek a takeover. The concern for some is that this may not necessarily be in the long term interest of the company, other shareholders or society as a whole.

Others argue that hedge funds improve the efficiency of the market and that hedge funds applying SRI principles might increase the incentive for responsible corporate behaviour.

There are also issues about the level of risk involved in hedge funds and their lack of transparency and disclosure, which is particularly relevant for Responsible Investors.

It is therefore important to fully understand how a hedge fund operates and the issues raised by critics of them if your charity is considering using hedge funds as a Responsible Investment option.

Examples

There are very few hedge funds or funds of hedge funds with Responsible Investment criteria on offer in the UK. Examples include:

AIG Global Investment Group’s Good Steward Fund offers daily socially responsible screening.

K2 Advisors can overlay negative screens to its funds of hedge funds.

Disclaimer

The featured products have been selected as examples only. The inclusion of a particular fund does not imply an endorsement of it. Moreover, the use of an example does not imply a recommendation of it over any other example or further example used or of any product not listed.