ESG and Hedge Funds
Anathema to hedge fund managers is having any strictures, active or passive that restrict their ability to operate in the way they see fit. Their mission has always been hard and well defined; alpha not beta. But there appears to be a new investment style that has entered the popular investing consensus, that of Environmental, Social, Governance (ESG) which is growing substantially in popularity but does not fit the standard hedge fund investment MO. It will be interesting to see how they rise to the challenge of getting involved in this relatively new concept to ensure they are in the way of new allocations and to protect their existing assets. “Performance data is contradictory and period-dependent but there is evidence and a coherent argument that, over the long term, ESG will outperform” – IPE June 2020
. Mainstream long only institutions, index fund managers and ETF providers have all been quick to recognise that demand for ESG related products has grown exponentially and that demand shows no sign of slowing down. They have profited nicely from manufacturing and selling products with an ESG badge. “In 2019, investors poured $20.6 billion into funds that incorporate environmental, social and governance factors — a 400% increase over ESG inflows in 2018" – IPE June 2020.
The hedge fund community should now seek to bring its unique skill sets to this area of the market, treat it as a new phenomenon, almost like a new investment instrument (think volatility as an asset class) and run with it, they won’t be sorry. Some who rely on private capital will still deploy the alpha vs beta argument but the vast majority who have institutional investors may not be able to ignore it. Many hedge fund managers are already tapping into this demand but the vast majority are not. “Only 37% of hedge fund managers vs double that number for their alternative asset manager peers — believe ESG will become more important over the next five years” according to a Preqin survey.
To sum up - “Hedge fund firms are flexible and are sensitive to clients’ needs. These managers can help define ESG investment practices and develop new strategies using innovative techniques and instruments. Pension funds and other institutions will need to decide on the benefits of engaging with hedge fund managers for ESG. The managers will need to win their clients’ trust and confidence to show that they are not the contradiction in terms which they may appear. Instead they can represent a complementary alpha source to existing ESG strategies”. IPE June 2020. This is essentially it, bring your skills into this or potentially miss out on a very large re-allocation of capital.
Blackheath Capital is launching its own ESG Liquid Alternative Market Neutral UCITS fund. For more details please contact us – info@blackheathcapital.com – 020 3880 6640
