Are Hedge Funds Exploiting Climate Concerns?

We measure a hedge fund’s exposure to climate concerns using its return covariation with the returns on a green-minus-brown stock portfolio (GMB beta). Hedge funds in the top GMB beta decile outperform those in the bottom decile by 8% per year on a risk-adjusted basis. We provide evidence that the managers of these funds are more skilled in exploiting the market’s climate concerns. Hedge funds’ aggregate portfolio of green stocks outperforms the market portfolio of green stocks, and their demand for put options on green stocks reliably anticipates lower stock returns. We also find that hedge funds tend to hold stocks with lower future carbon emissions, and investors reward high-GMB beta funds with greater flows.