Archive for the ‘Jed Emerson’ Category

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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It has long been accepted that financial capital is critical to social change efforts. Yet, it is only recently that social finance has been viewed as a defined and important marketplace.       

Today, a myriad of financial instruments, ranging from the traditional grant to complex debt/equity hybrids, are available to nonprofits and social enterprises. These instruments come from a variety of sources, from the traditional grantmakers to new social investors.

At the start of a new decade and after a turbulent economic stress period, social finance offers unprecedented opportunities to innovate within capital markets for impactful investment and sustainable change.

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