Hedge fund managers’ motivations for giving to charity may not be entirely altruistic.
Analysis of charitable giving by hedge fund managers suggests that managers of poorly performing hedge funds have a strategic reason for donating their personal wealth: staving off investor redemptions.
Hedge fund managers with bad returns were found to be nearly twice as likely to make a donation to charity in a study by finance professors Vikas Agarwal (Georgia State University), Yan Lu (University of Central Florida), and Sugata Ray (University of Alabama). Those suffering from low flows, meanwhile, were 50 percent more likely to give to charity.
The one-off donations made by these hedge fund managers were found to result in better flows and lower chances of shutting down compared to struggling hedge funds without philanthropic managers.
“Hedge fund managers can use donations to generate goodwill among current and potential investors, and gain their trust,” the trio argued. “This is particularly important during periods of poor fund performance which may lead investors to lose trust in their managers’ ability.”
For the study, the authors used a sample of 6,642 charitable donations made by 667 hedge fund managers between 1994 and mid-2016, which they analyzed alongside fund performance and flows data.
The donations were shown to improve net flows by 9 percent, with badly performing managers almost completely mitigating outflows through charitable giving.
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Beyond poor performance, fund characteristics such as fees and lock-up periods were also shown to influence hedge fund managers’ charitable giving. “If donations can help bring in more capital or improve fund performance, managers of funds with higher fees can earn greater compensation from making donations,” the authors said.
In fact, they argued that donations were “economically beneficial” for hedge fund managers. The median donation in the study, $17,500, paled in comparison to the increase in management fee earnings resulting from improved flows, which they estimated to be $45,900 for the median fund with $34 million of assets.
“These figures suggest that these donations are a ‘good deal,’ and this without even factoring in incentive fees, or fees in subsequent years,” the authors wrote. Still, they noted that these benefits appeared to be confined to large donations made by managers of small funds.
As for the other fund characteristics driving charitable giving, shorter lock-up periods – and therefore greater threat of investor withdrawals – were linked to higher donations, while managers of funds that were closed to new investors were less likely to give money. “Clearly, a fund that is closed for new investment has less desire to attract capital,” the authors wrote.
Even the targets of hedge fund philanthropy appeared to be strategic, with hedge funds favoring certain charities over others – examples including the Metropolitan Museum of Art, the William J. Clinton Foundation, and higher education institutions like Columbia University, Massachusetts Institute of Technology, and New York University. Such “focal charities” – non-profit organizations with five or more hedge fund donors – accounted for more than 43 percent of the donations in the sample.
Donations to these popular charities were associated with a “significant increase” in future net flows. Similarly, donations to charities that hold fundraising events catering to hedge fund managers and investors had a “pronounced” effect on flows, with such donations mitigating annual outflows by a further 7.7 percent.
“Based on these findings we conclude that at least some hedge fund managers’ charitable donations are likely to be strategic,” the authors wrote.