Hedge Funds & Sustainable Investing: Can the twain meet?

Generally speaking, Hedge Funds are viewed as opportunistic investment vehicles using complex strategies involving a mix of assets and investment practices, while Sustainable Investing seeks to generate profit by integrating social and environmental factors into financial investing practice. The two are seldom considered together.

In fact, they are often deemed at odds with each other: Hedge Funds as evil while Sustainable Investing is good.

Recently, I have come to believe that aspects of Fundamental hedge fund investing may be consistent with, though distinct from, Sustainable Investing. Specifically, practices such as adoption of a long‐term investment horizon, consideration of off balance sheet risk represented by environmental and social factors, heightened transparency, a focus on governance and other investor considerations are synergistic.

How did I get here?

In 2008 when I first joined Uhuru Capital Management (an investment firm which offered a fund of hedge funds product and intended to allocate 25% of its performance compensation through a foundation funding nonprofits working to build the field of social entrepreneurship), we were focused upon making a commercial return for our limited partner investors and then using some of the Firm’s returns to make impact investments through our Foundation. While interested, we were not focused on Sustainability.

But as the firm staffed up and fully launched in 2008, a funny thing happened on the way to the capital markets—well, actually, not so funny in that those markets imploded! Suddenly institutional and individual investors who had been making consistent returns had lost twenty, thirty and forty percent of their assets; while some portfolios of “social investments” returned four to six percent (which was a bit of a shock for mainstream investors now being told the new “up” was a 20% loss!). Last fall, the financial world as defined by traditional measures of risk and return was rolled on its head—and we saw how intricately social capital was woven through supposedly “objective,” rational markets with the rise of investor panic, market uncertainty and, in some cases, a betrayal of trust shutting those markets down.

As Uhuru Capital Management was a start-up, we were not yet invested in the 3rd quarter 2008. While we waited for the dust to clear, our CIO and I began a dialogue regarding the nature of Fundamental hedge fund investing practices. As we explored those practices and I learned more about how he approached hedge fund investing, I was struck by how many of the aspects of Fundamental investing (as described to me) were similar to investing practices of Sustainable finance. Not the same, mind you, yet quite similar nevertheless.

Simultaneous to this internal dialogue, an external dialogue evolved with investors that Uhuru was engaged with around our work. These investors raised a related question: While they appreciated the attributes of our core Fundamental strategy, they asked if we couldn’t create a truly “sustainable” fund of hedge funds product. What they sought was a “Long/Short” investment strategy pursued in a manner consistent with an investor’s commitment to Sustainability. Was such a thing possible?

These conversations became the genesis of a paper I then wrote to explore that question: Beyond Good vs Evil.

Now, I do not believe Fundamental hedge fund investing alone meets the sustainability bar for many investors. I do not believe Sustainable investing alone will save capital markets and asset owners from their worst inclinations as either individuals or investors. Yet I continue to believe it is worth exploring the various ways sound mainstream investing practice and Sustainable investing are in fact two parts of a single, evolving pursuit of Value.

What I sought to present in the paper was not “an answer” to the challenge Sustainable investing poses to hedge fund investors, but rather a set of questions and issues I believe worthy of our attention. If you do get a chance to read it, I would appreciate your feedback.

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Should Churches be Charities?

With the interest surrounding the recent investigation of the City Harvest Church in Singapore, I have been pulled into quite a few discourses on the subject of churches as charities.

It seems to me that the subject can be tackled on two levels: general (should churches be charities?) and the specific (which churches should not be charities?).

In this blog post, I will focus on the general question: Should churches or, for that matter, religious organizations, be designated as charities?

My short answer is: theoretically, “no,” but, practically, “yes.”

Let me explain.

For the theoretical answer, we need to go back to an understanding of what charity means. If you ask the man in the street, he will likely say that charity is about helping the poor, the disadvantaged and the needy of society. This is the most common understanding of what charity is about.

Using this yardstick, it is hard for most churches (or religious institutions) to qualify as charities. To be sure, church congregations include some, maybe even many, who are poor and needy, but that is just a coincidence. Membership of churches is not based on an individual’s particular station in life; rather it is based on a person’s subscription to certain religious beliefs.

Of course, many religious organizations are charitable in that they can be kind and giving towards the poor and needy – they raise money from among their followers to give to the poor and needy, and they have specific programmes such as shelters and soup kitchens for those in need. In such cases, these particular arms of religious institutions can properly qualify to be charities, but not the main institution which caters to a more diversified membership base.

Why, then, do the authorities generally allow a church to register as a charity?

The answer is historical. Sharifah’s chapter on “Different kinds of kindness” in the book provides a good historical account of how the definition of charity has evolved.

The significance of this legal definition is that the reach of charity was expanded from being merely about the alleviation of poverty (the first category and what most people understand charity to be) to include all and sundry causes that benefit the community. Over time, Commonwealth governments have used the last category (“other purposes beneficial to the community”) to specifically add new causes. For example, Singapore added sports as a charitable cause in 2005.

There are, however, unintended consequences of broadening the definition of charity. First, community resources and support that could have benefited the poor are diverted to other more glamorous but non-poor causes. Secondly, it reduces the accountability and due process for public projects that obtain money under the charity umbrella. (See here for a further read on this)

The reason for including religion as a major category of charitable clauses was that, at the time of the Act, much of the charitable work of providing for the poor and needy were being done by the Church of England. The government and the courts saw benefit in extending this feature and provided recognition for the Church’s efforts.

Today, the situation has changed; we have a plethora of churches and religious organizations. Most are not targeted specifically at helping the poor and needy and, some are arguably not even good for the community. In such a context, one can make a strong case for excluding religion from being a charitable cause.

But, in my opinion, it would be wrong to narrowly target religion for exclusion as a charitable cause.

If religion is excluded – meaning we revert to the layman’s notion of charity as helping the poor and needy – we need to also exclude sports, the arts, heritage, animals, education, environment, healthcare and a whole gamut of other causes of “community good” that have grown over time in the broad-based legal definition of charity. In my view, many of these other causes should go first before we remove religion.

As long as we do not change the legal definition of charity from the community good to only being about the poor and needy, we should keep religion as a charitable cause. Most religions do exist for the community good. They mostly preach goodwill and kindness towards our fellowmen and their leaders are generally selected for their good human qualities. Of course, some do not meet these criteria, but that’s when we get into a discussion about which specific religious organizations should not qualify to be charities.

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Permission to Do Great Things

Once, when Ashoka Fellow Karen Tse, founder of International Bridges to Justice, was speaking in Singapore, she was asked, “Which quality have you had to develop the most during your journey as a social entrepreneur?” Karen paused, then replied, “radical self-affirmation.”
           Radical self-affirmation—Karen’s striking words express an idea we should all consider. For one who wants to make a better world, to be a changemaker, the right attitude is central to success.
            What is this attitude? I would say they are:
–          Give permission
–          Define yourself
–          Believe
            The first part is granting yourself permission to do big things—to confront a pressing human need, see a solution, and say I will allow conscience and intuition to inspire me.
            There is no ritual to giving oneself permission; no single solemn declaration. Instead it’s a habitual resolve to focus attention on what is right, constructive, effective, rewarding.
          During start up, reasons for not taking action will attack from every angle: you’ll starve; you’ll put your career at risk; you’re not an expert; the problem cannot be solved; you are led astray by idealism. Other objections are downright demoralizing, especially if such doubts come from within: Why do you think you can solve this when no one else has? What makes you so special that you can fix this? Can you handle the disapproval and conflict that will inevitably arise?
            Self permission means resolving to answer, ignore, or overcome these doubts, knowing they sprout from a fear of failure.
            Inaction is to be feared far more than failure, which is a patient teacher. So every changemaker should meditate on the question: have you given yourself permission to take on and accomplish something great?
            The second attitude is defining yourself.
            Following conscience can lead to great opportunities. The citizen sector is a wonderfully open space. The sector is growing, so there is today an exciting admixture of skill, background, and experience. Having the right attitude means defining who you are in this environment.
     Will you enter the field as an equal contributor to its great efforts and conversations? Even as a novice, could you imagine your part—perhaps sharing some existing skill or knowledge or insight?  At a summit of the world’s top practitioners, would you delight in discourse and dealmaking, or escape to a backbench seat?
            The third attitude is to believe in yourself and your dream.
            Belief that change is possible is the nucleus of social impact. Belief allows us to pose ambitious goals and expect to meet them. Consider two hypothetical vision statements in urban housing:
–          “To improve housing conditions in urban slums”
–          “To transform all slums into thriving, secure communities”
      The first vision hopes for mere improvement, not transformation. A path is assumed, along which only modest steps may be taken. By contrast, the second statement is full of optimism and offers an image of the future. Belief is the agent that enables the latter kind of vision.
            All changemakers want to have a pattern-changing impact on the real world. Just as real is the attitude you need to cultivate to do that. Habitually affirm to yourself that change is possible and that you have an important role to play. And grant yourself permission to seek great impact. Only you can do that – nobody else.

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