An Extra Edge: A Provocative Look At Giving by Hedge Fund Managers

photo: Inked Pixels/shutterstock

photo: Inked Pixels/shutterstock

We spend a lot of time covering the who, what and how of philanthropy. Gifts are given and received, and with them may come influence and real impact on people's lives. But we’re also interested in why donors give. Answering that complex question has prompted quite a bit of inquiry over the years, including any number of studies and Francie Ostrower's classic book, Why the Wealthy Give: The Culture of Elite Philanthropy

While it's hard to summarize all this research, experts have pointed to a range of motives that drive philanthropy: a sense of responsibility, a zeal for solving problems, a desire for social status, and so on. 

But a recent study on hedge fund managers’ charitable giving is especially intriguing. It suggests that many Wall Streeters give money to make money. 

In the paper, authors Vikas Agarwal, Yan Lu, and Sugata Ray analyze a survey of 6,642 donations ($7,500 and up) by 667 hedge fund managers from 1994 through 2016. They drew from the NOZA database for the donations and Lipper TASS for fund performance. Their conclusions are interesting, to say the least. From the study: “We find that donations are driven by poor fund net flows and performance. Post-donation, donors’ funds experience significantly higher net flows compared to matched, non-donating peers.”

In other words, it appears that managers of underperforming funds often apply their personal donations strategically, somehow boosting their funds’ net flows, at least on average. Note that the study only finds a correlation between donations and increased investment in the funds. Fund performance remains unaffected.

While the study itself doesn’t investigate how this process might work, the authors hypothesize that managers’ donations stimulate goodwill and trust, a kind of PR move to prevent investors from jumping ship. Philanthropic managers may also gain a networking edge by hobnobbing with wealthy individuals, potential investors all, at fundraising events. 

One of the study’s conclusions is that donations to so-called “focal charities” where hedge fund managers congregate are more likely to be strategic. The networking effect is probably the reason why. That means these strategic donations may exhibit a geographic bias (New York City, say, or other major centers) and favor certain organizations. The Robin Hood Foundation comes to mind. So do elite universities, where high-net-worth alumni often gather for fundraising events. Smaller community nonprofits and organizations serving rural populations, for instance, are less likely to receive this largesse.

Whatever exact mechanic is in play here, it’s hardly surprising to see professional investors bring an element of strategy into their giving. No one can accuse Wall Street of a lack of ingenuity in finding new ways to make money. Quantitative prowess, risk taking, and working multiple levers are all marks of today’s massive financial sector, and that same quest for an extra edge seems also to play out in its philanthropy. 

Of course, Inside Philanthropy usually focuses on hedge funders whose enterprises have over-performed, rather than the reverse. But strivers take their cues from success. While investors like George Soros and Jim Simons haven’t had to worry much about poor performance, their philanthropy has certainly been strategic. We could also talk about David Gelbaum, Tom Steyer, John Arnold, Bill Ackman, and a host of other finance billionaires who’ve taken activist approaches to giving. 

Like any group of philanthropists, hedge funders’ interests and modes of giving vary. In general, though, we’ve found Wall Street givers to be a fairly conservative bunch. Unlike the tech crowd, they often prefer stewardship over disruption—pouring big gifts into elite universities and top cultural institutions, for example—and retain a firm belief in the power of markets even when their causes are “liberal.”

Many of the most legendary investors, like Warren Buffett, also have reputations for steady capital accumulation and a dislike of unnecessary risk. But in their study, Agarwal, Lu and Ray encountered less-celebrated wealth managers willing to devote an average of 40 percent of their income from management fees to these “strategic” charitable donations. 

That’s a substantial expense for an uncertain payoff. It brings to mind the fact that while the biggest Wall Street philanthropists have the luxury to engage in carefully considered giving (or not), the sector as a whole is willing to take enormous risks with the national economy, concerns about inequality and the fallout from crashes notwithstanding. 

See our coverage of top Wall Street donors here