Going green pays off for hedge fund investors

By Kevin Manne

BUFFALO, N.Y. —  Hedge funds that invest in environmentally friendly stocks tend to outperform those that don’t, making it a smart strategy for both investors and hedge fund managers, according to new University at Buffalo School of Management research.

The study analyzed the performance of nearly 4,000 hedge funds from 2012 to 2022 and found that those that focused on green (environmentally friendly) stocks outperformed ones that invested more heavily in brown (less environmentally friendly) stocks by a difference of about 8%.

“Considering the environment in your investment strategy is a significant win for both your fund performance and the planet,” says study co-author Cristian Tiu, PhD, chair and associate professor of finance in the UB School of Management. “These kinds of investments may lag in performance, but hedge fund managers who focus on green companies tend to do well and attract more money because investors like putting their money into businesses that are good for the environment.”

Using a calculation called the green-minus-brown beta, the researchers differentiated funds based on their investment tendencies towards green versus brown stocks. They then ran a series of calculations to make sure any differences in performance were due to the fund’s focus on green stocks and not because of market trends or other economic conditions.

The researchers say the superior performance of green hedge funds is due to the fund managers’ ability to effectively select and time investments, capitalizing on rising environmental concerns.

“Our findings highlight a growing trend where the alignment of environmental sustainability with financial objectives attracts both commendable returns and public support,” says Tiu. “And it comes from an unexpected player in the environmental, social and governance universe — namely, hedge funds.” 

Tiu collaborated on the study with George O. Aragon, PhD, professor of finance in the Arizona State University W. P. Carey School of Business; Yuxiang Jiang, PhD, assistant professor of finance in the Southwestern University of Finance and Economics; and Juha Joenväärä, PhD, assistant professor of finance in the Aalto University School of Business.