Are the Hedges of Funds Green?

Huan Kuang, Bing Liang, Tianyi Qu, and Mila Getmansky Sherman

♦ Over the past decade, hedge funds have increasingly embraced green investing. We develop a novel return-based measure of fund greenness and find that greener funds earn higher average returns, consistent with capturing a positive green premium, and are associated with lower risks, especially during adverse periods. We further show that performance gains are greatest among directional funds, whereas risk reduction is most pronounced among non-directional funds. We also provide evidence that managers of these funds exhibit superior green investment skills through green stock selection and green factor timing. Finally, investors reward greener hedge funds only when they demonstrate strong performance.

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