The Heart of the Hedge
While hedge funds are better known for seeking alpha than philanthropy, many channel their generosity through innovative non-profit organizations and foundations. They just do not usually talk about it.
With the economy limping, charities are concerned. The 2008 Study of High Net Worth Philanthropy found that between 2005 and 2007, charitable giving increased for nearly all high net-worth households, except for those with $5 million or more in income. The study said charitable giving dropped 9.7 percent, to $80,249, for those households in 2007 from $88,845 in 2005, after adjusting for inflation. That was before the recession.
While many fear charitable giving will decline even more in the face of the global economic downturn, hedge-fund sponsored philanthropies appear to be weathering the storm better than most. Philanthropy professionals say it is due in large part to the active participation by hedge fund leadership in such organizations.
"There is a lot of leadership in this industry," says Brian Walls, co-head of alternative investments at Newedge. "Paul Tudor Jones, Arpad 'Arki' Busson and Stanley Fink - they really send a message about getting involved."
Busson founded ARK, Absolute Return for Kids, in 2002 and was joined by Fink, former chief executive of Man Group, who left the firm in 2008 to pursue interests in philanthropy. And those are just a few of the big names who get noticed. Most hedge fund managers do not promote their giving and rarely, if ever, speak about their charities.
Newedge, which provides clearing and other services to a large portion of the hedge fund sector, also supports many charities, Walls says. "Each trading desk has a charity they support and they hit their clients up, they hit everybody up," Walls laughs, adding that he serves on the board of directors at the Chicago Academy of Science, as well as The Peggy Notebaert Nature Museum. These are destinations that he has shared with his children, as well as places where he decided he could make a difference.
Hands on philanthropy
"People who give away large amounts of money tend to be very intelligent, highly sophisticated people," says Peter Frumkin, author of the book Strategic Giving and professor of public affairs at the University of Texas at Austin.
He says hedge fund managers typically form networks of connections with other similarly successful, talented and resourceful people - who might ask, "Why should I just write a check when I have so much management, strategy and investment knowledge that I could share?"
That sort of hands-on business approach is sometimes referred to as venture philanthropy, and has its roots in scientific philanthropy, a philosophy of giving propagated by Dale Carnegie.
"Venture philanthropy gives a better opportunity to have a deeper connection to the non-profit, which can be more satisfying for the giver," Frumkin says. "I think there is no doubt it is a wonderful tool for getting younger, new donors interested in giving because it resonates with their business experience."
Take the Robin Hood Foundation, founded in 1998. The organization's mission is to fight poverty by applying investment principles to philanthropy. The organization is distinguished not only by its deep roots in the hedge fund community, but because the board pays for all of the organization's administrative expenses so 100 percent of the donations go to the mission. Robin Hood also analyses the return on investment (ROI) for all its philanthropic activities to assess the poverty-fighting value of every dollar the organization spends.
"Hedge fund givers ask hard questions and won't accept pat answers, but they are also more likely to be persuaded by a compelling story, especially if it's accompanied by a spreadsheet showing ROI," says Mark Bezos, managing director of communications for Robin Hood.
This year, Robin Hood's grant making is on course and should be steady at $100 million. While donations this year are smaller, he reports there are more of them. "It's the commitment to results that resonates with people who themselves are judged by their performance," Bezos says.
It is not only hedge funds, of course, that devote time to worthy causes. The Liger Foundation, funded exclusively by proprietary trading firm Liger Investments Ltd., was set up by Trevor Gile and his wife Agnieszka Tynkiewicz-Gile. The firm donates 30 percent of its annual net operating profits to the foundation, which founded "Trading Futures," a pilot program that sponsors an orphanage in Phnom Penh, Cambodia. The long-term goal is to develop human capital by preparing promising young people for higher education, as well as sponsoring that higher education, in order to trade a bleak future for a bright one. Trading Futures help is open to both orphans and other children in the community and is now being planned for Zimbabwe.
"If the Liger Foundation helps provide a future for a hundred such children, and only a dozen of them succeed professionally in their home country, their eventual adult contributions will in turn help thousands of people," says Gile. "If not a single child succeeds by any of the above definitions, we will still have saved a hundred children. It's a win-win situation."
Caring
Trevel Balser, director of development for Hedge Funds Care (HFC), a foundation dedicated to preventing and treating child abuse, also has seen a decrease in donations, but he hastens to add that hedge funds are showing good performance for 2009 and that the fund community remains philanthropic. HFC, founded in 1998 by Rob Davis, who enjoyed a long career in the prime brokerage business, has raised and dispersed more than $20 million to support its mission.
HFC raises most of its funds through personal donations and its annual Open Your Heart to the Children benefits, which are held in hedge fund hub locations, including Atlanta, Boston, Chicago, Minneapolis/St. Paul, Denver, New York, San Francisco, Los Angeles, Cayman Islands, London and Toronto. The proceeds are then distributed locally to community-based non-profit organizations that focus on the prevention and treatment of child abuse and neglect.
"What I have noticed is that people in the industry really enjoy the networking aspect of it, and so it is very important that we provide opportunities for networking in all of our fundraising endeavors," Balser says.
A great deal of research has been done on charitable giving, and it tends to be between 1 percent and 2 percent of household income, but Frumkin says the negative wealth effect caused by large and recent losses is an unknown. "To the extent that the people involved in hedge funds have lost or felt a major wealth effect, it's probably a short-term effect in terms of their perceived capacity to give," Frumkin says. "It has an economic and a psychological effect and it's going to take a little bit of time to work out." As the financial crisis winds down and markets recover, there is still hope that hedge funds and the philanthropies they support will have a good year.
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