Hedge funds eye responsible companies as 'wasteful'

Some hedge funds invest in socially responsible companies to change their focus to maximising value for short-term shareholders.

According to an Academy of Management Journal article, Why Activist Hedge Funds Target Socially Responsible Firms: The Reaction Costs of Signalling Corporate Social Responsibility, the issue is one of growing concern. Whilst having a social and environmental conscious is becoming mainstream, some activist hedge funds see this as value destroying in the short-term and are using such tactics are becoming an increasing problem.

Diversity, charitable giving, community volunteering and environmentally friendly policies are all signs of “wasteful” spending, with long-term uncertain returns. With hedge funds usually investing in organisations for less than two years the logical of their unfortunately understandable.

After analysing 506 activist hedge fund attacks in the US between 2000 and 2016, Mark DesJardine of the Pennsylvania State University, Emilio Marti of Erasmus University Rotterdam and Rodolphe Durand of HEC Paris determined that companies have an average 3 per cent chance of being targeted by activist hedge funds, but that this probability of attack rises to 5 per cent for the most socially responsible companies.

“After hedge funds exit, the CSR programmes of these companies can flatline for up to five years,” DesJardine said. “But what is also concerning is that CSR signals a broader potential to cutback spending in other areas where returns are long-term and uncertain. For example, in employee welfare and research and development. And the hedge fund is not responsible for any troubles the company experiences after it sells its shares and is gone.”

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