A Q&A with Tony Cowell, head of alternative investments at KPMG (Cayman Islands), on the growing role of philanthropy in the hedge fund industry.

Hedge fund managers used to have one job description – generate alpha. But in recent years, investors have been pushing managers to also think about the social impact of their activities. Investors want to know that their capital is being used to make the world a better place, and not just to line a manager’s pockets.

With more than $3 trillion in global assets under management, the hedge fund industry has the potential to play a key role as a leading source of philanthropic capital. To discuss what this role might look like and review what steps hedge fund managers can take now, Cayman Alternative Investment Summit (CAIS) spoke with Tony Cowell, head of alternative investments at KPMG (Cayman Islands).

1. How have hedge fund managers approached philanthropy in the past?

Hedge fund managers have a long-standing relationship with philanthropic organizations. Some of the most well-known charities today were started by professionals in the hedge fund industry. For example, the Robin Hood Foundation was founded in 1988 by Paul Tudor Jones to help fight poverty in New York City. Now led by several well-known hedge fund managers, the organization has provided local poverty-focused programs with several billion dollars in funding. Many other managers have established foundations and hired full-time staff to manage their philanthropic commitments, though these activities may not get as much public attention. (For more, see: Paul Tudor Jones' Success Story.)

2. Why do people care so much about what hedge fund managers do with their money?

There are a couple of reasons. One, the industry has ballooned in both size and influence in recent years. It’s impossible to ignore $3 trillion in assets. Hedge fund managers aren’t just traders playing around with a few thousand dollars of their own money. They can move global markets, they can influence political elections, they can sink a company or help rebuild one. All this leads to more public scrutiny.

Second, the hedge fund industry still isn’t well understood by the general public and the media. Yet, the industry plays an increasingly important social role by managing investments for universities, pension funds, charitable foundations and other institutional investors. It is estimated that over two-thirds of total hedge fund assets under management come from these institutions.

Perhaps even more startling is the prevalence within the industry of large-scale philanthropic activity – the industry continues to breed active philanthropists and inspire generations to come together to help some of the world’s biggest problems.

So there’s this dichotomy. Hedge fund managers, therefore, need to accept that the scrutiny isn’t going away and that they should continue to embrace a more socially responsible role.

3. What’s the biggest mistake managers make when engaging with charities?

They’re not hands-on enough. In the philanthropy world, there’s no global database for charitable causes with standardized details on the potential return on investment for each donation. Some managers have privately built sophisticated systems that come close, but we’re still very much in the early stages.

That’s why it’s important for hedge fund managers to take their philanthropic activity more seriously, and get involved in the decision-making process of which causes to support and how. Hedge funds can also help push charities and other non-profit organizations to focus more on the impact of each dollar, an area where previous financial and investment expertise can be particularly helpful. Or they can take the ultimate hands-on approach – sitting on the board of a charity.

4. How do you see the relationship between hedge funds and charities evolving?

It’s clear to me that government funding by itself won’t solve all of the world’s most pressing issues – from combating climate change to eradicating infectious diseases to improving access to education. Private, philanthropic capital must play a role, and already we’re seeing some of the world’s most famous philanthropists rewriting the playbook about how to address these challenges.

In particular, many managers are now turning to strategic partnerships, with other investors, public and private foundations, universities, financial institutions and business leaders, to maximize the impact of their philanthropic activity. For example, a consortium of high-profile investors recently announced a $1 billion venture fund that will invest in clean energy technology. Research has shown that these types of partnerships greatly expand the reach and impact of philanthropic capital.

Philanthropy isn’t like the rest of the investment world where there’s always the threat of a competitor jumping on an idea and reducing the return potential. In fact, it’s just the opposite. Philanthropy is most effective when it’s an all-in effort, with contributions coming from all over. There’s no competition for who can donate the most money or make the biggest difference. It has to be a collaborative effort. It’s time the hedge fund industry as a whole embraces its potential as a champion of social causes, and helps lead the fight to build a socially responsible world. (For more, see: How Social Venture Capital Is Changing the World.)

 

This Q&A with Tony Cowell, head of alternative investments at KPMG (Cayman Islands), comes from the Cayman Alternative Investment Summit (CAIS), an annual conference that brings together the world’s leading institutional investors, fund managers, academics, economists, regulators and professional service providers to discuss the pertinent topics shaping the global alternative investment space.

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