Hedge funds and unscrupulous business practices are often assumed to be bedfellows – even before one invokes the name of Bernie Madoff. After all, it seems that nothing but a blind allegiance to profit as an end, regardless of the means, could yield the sorts of impressive returns for which hedge funds are known. Consumer consciousness, however, is beginning to shift, and when it comes to more and more ethical and socially conscious investment options, the demand is growing. Even hedge fund managers are beginning to take notice.
In many ways, whether or not ethical and socially concerned investing can lead to the high profits that hedge funds typically chase after remains to be seen. Nevertheless, the tide of making money without weighing the conscience is looking more and more like an anachronism. Whether you’re just beginning a path of study with an interest in the ways and means of the financial sector or you have been handling investment portfolios for decades and want to stay ahead of the curve, here is a handful of reasons why sound ethics are a vital part of investing’s future.
Consumer Demand
Hedge funds favor short-term gains over long-term profits. As such, there is some doubt as to whether or not a hedge fund – by definition – can engage in responsible investing, but the fact of the matter is that consumer investors want a more responsible and ethically conscious way to invest, and they are more actively seeking out investment opportunities that do not conflict with their consciences.
Right now, more than $70 billion is held in investments that apply some kind of ethical or socially conscious screen, and that amount is expected to grow, and why wouldn’t it? Some statistics show that ethical funds are outperforming non-ethical ones.
As concern over what and how money is invested continues to gain ground among investors, hedge funds will need to find responsible ways to invest in order to continue gaining fresh capital.
Shifting Attitudes, Beliefs and Behaviors
It isn’t just that consumer demand in investment services is shifting. The ways in which people spend their money on a day-to-day basis is taking on a different tone as well. Companies whose practices are perceived to be a threat to the environment, workers, sustainability and the like are being pressured to change their ways. This attitude shift is affecting people’s buying behavior; not only are consumers demanding more ethical investments, but buying behavior is changing so that companies and industries viewed as unethical in their practices are beginning to see their bottom lines negatively affected, which is hardly a reason to invest in them – even if your main concern is making money.
Transparency Over Opacity
Gone are the days when investors just wanted to see their piles of money grow into bigger piles of money, no questions asked. The opacity with which investment firms and hedge funds, in particular, have operated is less and less tolerated or popular. People want to know what their money is funding so they can feel good about the money they are making. They also want to ensure it isn’t being dangerously leveraged. Being forthcoming about how and where money is being invested is another aspect of the investment landscape that is coming more sharply into focus all the time.
The Short View Is Too Unstable
The sharp economic downturn experienced by the United States 2007 and 2008 has made many people wary of any investment philosophy that emphasizes a short-term gain over the potential pitfalls of an unforeseeable future. While hedge funds exist to exploit the short-term profit, the pool of investors willing to participate in that type of gamble continues to dwindle. Hedge funds must find a way to “hedge” their capital without creating market instability.
The Definition of “Good Results”
For a long time, the idea of “good results” in the investment world dealt strictly with profit margins and growth. As consumer consciousness continues to concern itself more and more with sustainability, workers’ rights, environmentalism and other concerns or a more just world, the definition of “good results” is changing. Increasingly, people don’t just want their money to make money – they want it to do good or, at the very least, not do evil.
Ethical investing is a relatively new frontier, but it’s one that is gaining adherents. Hedge funds, because of their alternative and somewhat devil-may-care approach to investing, may seem like an unlikely partner, but as consumer demand increases, it looks to be in their best interest if they want to stay competitive in a world that is increasingly concerned about what money is up to.
About the Author: Francis Comerie is a contributing writer with a graduate degree in Financial Security Analysis.