Return on Investment

    Hedge funds intro: Overview of how hedge funds are different than mutual funds

What can the social sector learn from hedge funds?  Hedge funds are unregulated by the SEC, cannot market (can you name a hedge fund), are limited to doing business with accredited institutions, and take on average 2% as a management fee plus 20% of all profits.  Why do sophisticated investors happily turnover their capital to a hedge fund manager?

The social sector’s competition is often the hedge fund.  When a prospective donor considers the worthiness of a cause they weigh it against the return on investment offered by the charity versus an infusion of capital into the market.  A social sector organization has a distinct advantages versus a hedge fund.  They can market the cause, are regulated, open to engaging with anyone who is interested in the cause, and authorized to restrict dollars donated into specific channels without a management fee.  In a snapshot analysis, a worthy social sector organization should be very attractive.  Even more compelling a charity can benefit a greater group of people than just the investor and the hedge fund manager.  As Seth Godin and Simon Sinek reminds us, a corporation (for profit or nonprofit) cannot love us but the people who work within the enterprise can.  The shared belief that unifies a cause for the greater good is potent.  The sense of hope that a problem can be solved with specific and measurable activities is transformational.

So why do prospective donors turn to the markets instead of making an investment in a social cause?  A hedge fund has a record of success.  Professionals and a network of peers are recommending the hedge fund as a reliable way to grow an investment.  The act of growing ones money so they will have even more to do good on a larger scale at a later date is more compelling than the narrative of contributing to the social sector today.  The hedge fund has a strategy in place and hires people who are committed to the model.  The psychology around the likelihood of a positive return on investment is higher with the hedge fund than the social cause.

So, the challenge to the social sector is not to think and act more like a hedge fund but rather to amplify the human element.  The Gates-Buffet Giving Pledge has challenged wealthy peers to commit to contributing half their fortune to charity allowing for a powerful confluence of opportunity.  The chance to re-frame the discussion.  It is no longer about financial return on investment (which is tangible and cannot be discounted) but more vitally the emotional return on investment.  The opportunity to find the intersection of belief.  To engage an individual and a tribe of people committed to taking a heroic journey that will forever change their community.  Hedge funds are limited in that they can only take capital and return more capital in exchange for an individual’s time and custodianship of an investment.  Social sector causes provide a vehicle to measurably alter the way one spends their time and the results of this journey can forever change the landscape.

I frequently return to the short story by Jean Giono, The Man Who Planted Trees.  An unlearned peasant transforms a war torn region by planting trees for half a century.  His efforts revitalize a region that were once considered a wasteland and unworthy of being inhabited into a thriving community.

When I reflect that one man, armed only with his own physical and moral resources, was able to cause this land of Canaan to spring from the wasteland, I am convinced that in spite of everything, humanity is admirable.  But when I compute the unfailing greatness of spirit and the tenacity of benevolence that is must have taken to achieve this result, I am taken with an immense respect for that old unlearned peasant who was able to complete work worthy of God.

I would suggest no hedge fund has ever made an equal return of investment.  Our time and talent is valued far more deeply than money will ever be.  A donation is the fuel for our adventure, the return on investment is the connection of ideas and people.

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