If Hedge Funds, Private Equity and Venture Capital Suck, Why Not Impact Investing?
Matthew Yglesias has persistently noted that investment strategies can’t outperform the economy as a whole over the long run and fund managers of alternative asset classes (private equity, hedge funds, etc.) tend to make out better than their investors. Apparently, venture capital is no better according to a new report from the Kauffman Foundation. On hedge funds, Yglesias opines that,
Insofar as hedge fund managers are just running a scam where one class of rich people rips off another class of rich people, I’m not sure there’s anything systematically problematic about this. But a large share of the money invested in hedge funds seems to come from foundation endowments and pension funds. That in turn makes me wonder to what extent some of the dysfunctional aspects of the financial system can be traced back to dysfunctional governance of those institutions.
I’m not going to quibble with Yglesias’s assertion that the “dysfunctional governance” of foundation endowments and pension funds has some relationship to the nefarious aspects of our financial economy–in fact, the new Kauffman report urges investment committees to conduct greater due diligence of their venture capital investments–but perhaps “news” that private equity, hedge funds and venture capital firms perform no better than any other actively managed stock funds will encourage foundations to reallocate their wealth to impact investing. The Cordes Foundation, for example, has shifted two-fifths of its endowment into impact investments after its initial twenty percent investment outperformed everything else in its portfolio.
The key is for foundations (and wealthy philanthropists) to see impact investing as a choice between or complement to private equity, venture capital and other investments made in the interest of managing wealth and endowment perpetuity, not as a flat out replacement to traditional grantmaking.
To that point, here is an excellent presentation on impact investing by Fran Seegull, Managing Director of Investments at ImpactAssets: