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Are Hedge Fund Managers’ Charitable Donations Strategic?

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Talmage Dobbs, Jr. Chair and Professor of Finance, J. Mack Robinson Robinson College of Business, Georgia State University

Vikas Agarwal, Talmage Dobbs, Jr. Chair and Professor of Finance, J. Mack Robinson Robinson College of Business, Georgia State University

By Vikas Agarwal, Talmage Dobbs, Jr. Chair and Professor of Finance, J. Mack Robinson Robinson College of Business, Georgia State University

There is a large body of research on individuals’ charitable giving, but the extent to which business professionals, such as hedge fund managers, strategically donate personal wealth to further their business interests has not received much attention. Hedge fund managers have become one of the wealthiest groups in America, so their personal charitable donations are of interest to those who study philanthropy.

Charitable giving is an avenue for managers of poorly performing hedge funds to generate goodwill and trust among investors. Attending fundraising events allows them to network with other high net worth individuals who might invest capital or network with other hedge fund managers who may provide valuable business information.

A study I conducted with Yan Lu, Assistant Professor of Finance at the University of Central Florida, and Sugata Ray, Assistant Professor of Economics, Finance, and Legal Studies at the University of Alabama, examines the motives behind hedge fund managers’ charitable donations and the effects of their donations on the net flows and performance of the funds they manage.

Our study of 6,642 charitable donations by 667 hedge fund managers over 22 years found some interesting patterns. First, we observed that managers of poorly performing funds with dwindling flows are more likely to donate. Second, we identified several hedge fund characteristics that are predictive of charitable donations by their managers. For example, managers of funds that are closed to new investment are less likely to donate. Finally, we observed a significant increase in net flows for donating funds, and particularly for poorly performing donating funds.

Collectively, our findings indicate that hedge fund managers’ donations may be strategic. The types of donations we found more likely to be strategic were one-off non-recurring donations and donations to certain charities that are popular among the hedge fund community. Our findings show that even personal charitable contributions may not be purely altruistic.

Vikas Agarwal is H. Talmage Dobbs, Jr. Chair and a professor of finance at Georgia State University’s Robinson College of Business.

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