The hedge fund boom sweeping the investment industry has left many faith-based healthcare investors standing on the sidelines, but that could change with the arrival of new hedge funds designed to meet their investment needs.
The launch of these funds removes a stumbling block for Catholic and like-minded healthcare organizations that wanted to invest in hedge funds but couldn't stomach hedge funds' historical unwillingness to accommodate their desire to avoid certain companies.
Say a hedge fund manager wanted to buy shares of Imperial Tobacco Group, there would be nothing a faith-based investor in the hedge fund could do to prevent it or likely even know about it. Two Catholic-influenced hedge funds hitting the market get around that by creating either separate accounts or a separate hedge fund designed specifically for those investors.
The funds are the latest twist on a well-established segment of the market that allows faith-based healthcare systems and other institutional investors to apply their own values to their investment portfolio. Traditionally, the effort, called socially responsible investing, was confined mainly to stock investing.
But with the hedge fund industry booming and large faith-based systems investing large amounts of money, the two investment niches have found a way to get together.
The Good Steward Fund, run by Highland Associates, Birmingham, Ala., appears to have been the first socially responsible hedge fund out of the blocks with its launch in June. Another socially responsible hedge fund, the BBT SRI Fund, run by a Bass family-owned investment firm, is set to start up in January 2005 and a third fund overseen by a socially responsible investing veteran, Mellon Financial Corp., is in the early planning stages.
All three carry the goal of providing access to hedge fund strategies while avoiding investments in the securities of companies that conflict with Christian religious values, a segment of the hedge fund market that is ripe for expansion, investment executives say.
Hot for hedge funds
Hedge funds are hot right now in the investment world because they often rely on complicated or unusual strategies that can produce good returns even when markets aren't performing well. Until just a few years ago, hedge funds were considered a niche investment for the wealthy only, but now the funds are going mainstream, with one former Wall Street trader reportedly collecting $3 billion to launch a new traditional-style hedge fund.
Not everyone is on board with the concept. Moody's Investor Service recently warned that healthcare investors might be taking excessive risks with hedge funds (Sept. 27, p. 16). Only large, healthy systems are in a position to invest in hedge funds, and those with limited funds generally should avoid them, Moody's said. Moreover, this year's returns haven't been particularly good. One benchmark, the CSFB/Tremont Hedge Fund Index, returned just 3.8% in the first nine months of the year, a bit ahead of the Standard & Poor's 500 stock index, which returned 1.5% in the same period, but below expectations for good returns in all markets.
But hedge funds' long-term track record of offering diversification and better returns is drawing investors of all stripes. Christus Health, Irving, Texas, a Catholic system of more than 40 hospitals, is moving ahead with a hedge fund allocation, said Mike Kelly, the system's director of treasury. Kelly had a role in the design of both the Good Steward and the BBT SRI funds and is cheering on the development of a third.
"I need more of them," Kelly said in reference to socially responsible hedge funds. Faith-based investors such as Christus can only benefit by having multiple choices when considering an investment in a socially responsible hedge fund, Kelly said.
The Good Steward and BBT SRI funds offer different approaches to hedge fund management that might carry appeal for different investors.
The Good Steward uses a "fund of funds" approach that was designed with comment from several Catholic healthcare executives. A fund of funds invests in several different hedge funds with the goal of minimizing exposure to any one hedge fund, an important issue in the hedge fund arena, which has experienced some high-profile and costly meltdowns. Long-Term Capital Management's 1998 collapse and government-organized rescue is the most famous of them.
Though Highland is manager of the fund, the day-to-day investing is carried out by AIG Global Investment Group, the investment unit of American International Group, and a longtime hedge fund of funds manager.
Catholic systems interested
Officials at 41-hospital Catholic Healthcare West, San Francisco, are taking a look at the Good Steward Fund for a possible new allocation. "We are considering hedge funds and ... would seriously consider" the Good Steward Fund if its investment oversight committee decides to go forward with an allocation, said Jesse Bean, vice president and treasurer at CHW.
Putting money into alternative investments like hedge funds within a socially responsible framework has been a dilemma for CHW and others, Bean said. From an investment perspective, they generally make sense, but fitting them into a socially responsible approach has been difficult.
CHW seeks out investments that avoid companies that conflict with the Roman Catholic Church's values. CHW screens out companies with a percentage of revenue greater than a set target: nuclear weapons (2%), non-nuclear weapons (4%) and tobacco (10%). CHW won't invest in for-profit hospitals or companies with ties to the production of abortion drugs, Bean said.
Bean also served on the consulting board to the Good Steward Fund and said he believes it adequately addresses the needs of Catholic and many other Christian healthcare investors and addresses an area of strong demand. "I'm very optimistic about the future of this fund," he said.
Executives at Catholic Healthcare Partners, Cincinnati, also plan to consider the Good Steward Fund. "The concept seems very intriguing to us," said Bill Shuttleworth, senior vice president and chief financial officer for the system. (Jerry Judd, vice president of Catholic Healthcare Partners' treasury department, also serves on the fund's consulting board.)
Bass family steps in
Christus executives are looking at the Good Steward Fund for a possible investment but also are contributing to the creation of the BBT SRI Fund. Christus officials decided about four years ago to invest in low-volatility, absolute-return strategies, the kind found in hedge funds, Kelly said in an e-mail. Christus' current hedge fund allocation is 20% of its roughly $1 billion in operating funds, Kelly said.
Christus executives are looking to earn higher risk-adjusted returns in hedge funds than the system would get from a traditional portfolio of stocks and bonds.
The BBT SRI Fund takes a more advanced, less costly, and potentially more risky approach than the typical hedge fund of funds. The BBT SRI uses a multistrategy single manager approach, which strips away an extra layer of fees found in fund of funds approaches like the Good Steward Fund. But that approach also concentrates manager risk-such as the risk of a fund manager collapsing-with a single firm, making the manager selection process all the more important.
The BBT SRI Fund is managed by Barbnet, an investment unit of Texas' Bass family, and a longtime investor in hedge funds, said Patrick Linbeck, a director with Salient Partners, Houston. Salient, a money manager, assists BBT with marketing and will help with its SRI fund.
The BBT SRI fund will mirror an existing hedge fund called BBT but with social screens set up using Christus' advice, Linbeck said.
Meanwhile, executives for an investment unit of Mellon, an experienced SRI investor, are in the early planning stages of its own SRI fund of funds. Mellon already manages an $800 million traditional investment vehicle called the Catholic Healthcare Investment Trust and wanted to explore the possibility of applying screens to hedge fund investing. "There's a fair degree of interest in it. ... We are satisfied it's doable," said Phil Maisano, chairman and chief executive of EACM Advisors, a fund of funds unit of Mellon.
They'll make a decision next year as to whether they'll proceed with a fund, he said.