Study Shows Donations Help Fund Managers’ Bottom Line

December 31, 2018 James Heinsman Hedge Fund News

Sometimes managers make charitable donations in order to improve money flows and keep their funds from shutting down, according to a new study conducted by three finance professors.

Vikas Agarwal of Georgia State University, Yan Lu of University of Central Florida, and Sugata Ray of the University of Alabama conducted a study to see the results of fund managers’ donations on the viability of their funds. The trio found that hedge fund managers with poor returns were almost twice as likely to make a charitable donation, and those with low flows were 50 percent more likely to give to charity.

The one-time donations did indeed result in better flows and reduced chances of their hedge funds closing compared to poorly performing funds whose managers did not give money to charity.

“Hedge fund managers can use donations to generate goodwill among current and potential investors, and gain their trust,” the researchers declared. “This is particularly important during periods of poor fund performance which may lead investors to lose trust in their managers’ ability.”

Poor performance was not the only thing that influenced managers’ generosity. High fees and lock-up periods also contributed to the managers’ giving habits.

“If donations can help bring in more capital or improve fund performance, managers of funds with higher fees can earn greater compensation from making donations,” the authors wrote.

The study showed that donating to charities was good business for the managers. The median donation in the study was $17,500, which was only a fraction of the amount the manager earned in fees resulting from better flows, which was estimated to be about $45,900 for the median fun with $34 million in AUM.

“These figures suggest that these donations are a ‘good deal,’ and this without even factoring in incentive fees, or fees in subsequent years,” the authors concluded. However, the benefits seem to be limited to large donations made by managers of smaller funds.

Charity, Sugata Ray, Vikas Agarwal, Yan Lu,

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