Generally speaking, I try to stay away from any public commentary about politics. However, recent activity by the “Hedge Clippers” is becoming increasingly difficult to ignore, especially now that they have started showing up at personal residences (Paul Tudor Jones) and hedge fund conferences. Just yesterday, the Hedge Clippers burst into a 400-person investment conference (the 13D Monitor’s Active-Passive Investor Summit) to protest fast food workers wages. In fact, it will be interesting to see if the Clippers get, well, SALT-y next month, donchathink?
Now, before I continue, let me just say this: I get it. As the daughter of a single mother who worked in secondary and higher education all her working life, I extremely well equipped to see both sides of the socio-economic coin. Our society isn’t perfect and people are pissed. Post-2008 this ire has often and increasingly been directed at Wall Street. In recent months, however, anger seems to have coalesced around a single boogeyman: the hedge fund manager. And I just have to wonder: Is all that ire deserved or are hedgies just the easiest targets?
One of the biggest complaints of the Hedge Clippers is that hedge fund managers are “buying” politicians through heavy donations to political candidates. We do know that many in the financial industry take an interest in politics, but I thought it would be interesting to actually look at the top 100 political donors for 2014 and see what the numbers actually looked like. While there were certainly hedge funds that made the list, it may surprise the Hedge Clippers and others to know the facts behinds hedge funds and politics.
Out of the top 100 federal political donors in 2014, a mere 14 (that’s 14% for those of you playing along at home) were hedge fund managers. Perhaps more interestingly, of those 14 politically-minded hedge funds, a full 50% of them gave 100 percent of their donations to Democrat or Liberal candidates, while the other 50% primarily donated to Republican or Conservative candidates. That’s probably a lot more balanced than most folks would have expected.
In fact, if you want to get angry at folks just because they give large sums of money to political candidates, you should probably boycott films like The Help, Lincoln, Shrek and Cast Away because Dreamworks made the list of top 100 political donors. And don’t move, store or mail anything either: Uline was in the top 10 political donors for 2014. Maybe the Hedge Clippers should find new groups to help spread their message. I recommend these groups be called the Dream Killers and the Box Cutters, respectively.
However, yesterday’s protest beef centered primarily around minimum wage requirements for fast food workers. With chants of “Show us $15!” the Hedge Clippers are angry that “A group of activist investors are behind the big expansions in franchising at fast-food restaurants that have netted hundreds of millions in profits for hedge funds.”
And it’s that phrasing that kind of butters my toast. While a hedge fund is a profit-driven enterprise, they generally take a relatively small percentage (20%) of those profits. The rest of the returns go to end investors for whom the hedge funds act as fiduciaries.
Fiduciary responsibility means, at least in part, that the fund manager has a responsibility to act in the best interest of his or her investors, including, but not limited to doing things like behaving in an ethical way and making decisions to protect (and in the case of an asset manager) grow the assets of the firm. Perhaps the case Bristol and West Building Society v Mothew summed it up best when it concluded: “A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”
And that’s interesting to note, since many pension plans, including teachers' pensions who have been early supporters of the Clippers, are investors in hedge funds. They are among the very beneficiaries of hedge funds who “extract maximum profits” through the use of activism and other hedge fund strategies. Neat, huh? In fact, not making “maximum profits” is often enough to trigger a redemption request.
Perhaps if the Hedge Clippers really want to enact change, they shouldn’t start with the people who have a fiduciary responsibility to generate profits for their end investors. Maybe they should start lobbying and educating end-investors about things like Socially Responsible or ESG Investing. In this particular fiduciary relationship, the bond of trust is not only to achieve returns, but to have an environmental, social or governance or other positive impact at the same time.
And the sustainable and responsible investment movement is definitely on the rise, growing 76% between 2012 and 2014. Unfortunately, interest in this space still has a ways to go. In a survey of the mass affluent conducted by Spectrem, social responsibility ranked dead last in importance in the investment selection process. For those 64 and up (who perhaps not surprisingly have the highest mean wealth), when ranking on a scale between 0 and 100, scored socially responsible investing at a mere 30.7.
But looking ahead, the Hedge Clippers have something to be happy about. The mass affluent under 49 years old rated their interest in socially responsible investing at nearly 50, so the times they will be a-changing, and millennials are even more interested in impact investing. Over time, that interest in ESG will have more of an impact on investment options and strategies. Until there is more of a wealth transfer, however, perhaps it’s better for groups like the Hedge Clippers to put pressure on the folks that really call the shots in our industry: Investors.
Sources: CNBC, Policyshop, Millionaire Corner, Inc. Magazine, Hedgeclippers.org, OpenSecrets.org