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Marianne Scordel, Bougeville Consulting

Hedge funds to become categorised based on PRI criteria


The PRI, supported by the United Nations and the leading proponent of responsible investment, is working to standardise the way in which investors source and allocate capital to hedge funds who base their investment strategies on environmental, social and governance (ESG) factors. 

This concept of responsible investing, which also goes by the name of Impacting Investing, is becoming increasingly important to investors as they consider the long-term consequences of how and where they invest. 

Yet while many global corporations are signatories to UN PRI (Principals of Responsible Investment), the number of hedge fund signatories remains extremely low. According to Marisol Hernandez, Manager, Investment Practices, UN PRI, “We have no more than 30 or 40 managers but you don’t need to be a PRI signatory to develop an RI policy. Investors come to us and ask ‘Who are those managers who are signatories?’ The problem we have is that the number of managers is still very small in comparison to the total industry.”

In the first step towards bringing greater clarity and uniformity, on how to think about this issue, UN PRI engaged with AIMA and the Hedge Fund Standards Board to develop a DDQ to help managers respond to investors in a consistent way. The questionnaire1, known as the HF RI DDQ, is available on AIMA’s website and will be part of the wider Fund Managers’ DDQ this autumn. 

“The idea was not to repeat the same questions on governance already covered by AIMA. We came out with four questions that focus on responsible investments for investors. Governance is a key starting point, in our view, when thinking about developing an RI policy,” says Hernandez. 

Referencing a recent event in New York2, where these issues were debated, Hernandez notes that one of the questions that managers raised during the day was, ‘Where do we start with this?’ 

The first step, she says, is to develop an RI policy, which then prompts the next question: ‘If I develop a policy, would I need to change my investment strategy?’ 

“The answer, which came out loud and clear, is ‘No’. It has no bearing on the strategy whatsoever. And that’s important for managers to be aware of,” asserts Hernandez. 

“The way I understand it is that allocators who like your strategy will look at your RI policy concurrently with – not instead of – their more traditional due diligence,” says Marianne Scordel, Founder of Bougeville Consulting, a consulting firm for hedge funds now based in New York. “Your investment strategy, and your returns that go with it, is the reason why they’ve decided to look at you in the first place, so changing that would completely defeat the purpose,” adds Scordel, who attended the PRI event in New York last month. 

Another question that came up at the event was how to think about PRI at the investment level. 

When investors are looking at funds in relation to ESG, there are many funds that are doing something in respect to this, to some degree, but they haven’t labeled it as responsible investment per se. Take, for example, the ‘G’ or governance aspect of ESG. This is something hedge funds have made a lot of effort improving since the financial crisis in ’08. 

“We are engaging with managers and in our view, as part of our work at UN PRI, we want to help them to better communicate this. For the ‘E’ and the ‘S’ components, there is still a lot of work to be done,” says Hernandez. 

With investors becoming ever more discerning over which managers to allocate to, having access to clean data that provides evidence of those running RI policies could, according to Hernandez, become an important factor in how managers differentiate themselves from their peers.

“If investors are selecting managers based on ESG criteria, there is still a lack of good data available today. The advantage we have, however, is that because little has been done, we can develop the baseline for engagement. We are engaging with database providers to help with this. For example, the HF RI DDQ is available on eVestment’s platform and we are in discussions with other database providers. For investors looking for these types of funds, they will become more visible,” she says.

Few investors have a proper process in terms of applying RI to how they select managers. They want to set the bar high; hence the need to standardize the HF RI DDQ questions that are now available on AIMA’s website and eVestment. 

“What I have noticed is that investors are indeed keen to identify how managers look at all thing social and environmental. It is true that they sometimes find it hard to identify what a manager may be doing in those respects, in the absence of a common framework; conversely, many of them seem to feel a policy may not be enough as it could also serve as a marketing exercise more than the reflection of what they actually do. More external guidance, or availability of specific data, would be welcome,” confirms Scordel. 

Part of the reluctance towards becoming UN PRI signatories is the perception that it comes with additional responsibilities. Part of it is simply fear of the unknown and a lack of understanding as to how to properly incorporate an ESG policy into their business. And yet another reason is largely market-based. Ten years ago, there wasn’t too much interest in PRI. Now, investors are setting the bar high and looking much more closely at this. As this becomes more of a trend, hedge fund managers will likely respond in kind.

As Hernandez confirms, Man Group is becoming a PRI signatory. 

“They are running multiple hedge funds across a number of different strategies and that’s what we want to see,” she says, stressing that education is an important aspect of this to help build awareness among portfolio managers. 

“We are working with CAIA to help educate the next generation of fund managers on responsible investing. CAIA is going to include ESG investing as part of its curriculum, going forward. Education is the first step, then implementation and then reporting.”

In addition to the HF RI DDQ, Hernandez confirms that UN PRI are also engaged in creating a series of working groups using the HFRI taxonomy for different strategies, as well as working on a second guide on how to implement ESG into hedge fund strategies. 

“Based on HFRI, we will develop working groups for quant funds, market neutral funds, credit funds, long/short equity funds etc., all of which will be overseen by an advisory committee. Harvard Management Company sit on that advisory committee, as well as APG, AIMA, HFSB an CAIA.

“This is to create consistency within the industry. We don’t want to create a whole new taxonomy. Each working group will determine how best to implement ESG factors into the respective investment strategy,” says Hernandez. She confirms that work on formulating the different working groups will commence in September, while the first guide is scheduled to launch in December. 

“The HF RI DDQ is just the first step. The long-term goal is that if an investor is looking for RI hedge funds, they will have the necessary visibility across all strategies to find the best managers to allocate to. I think the future of hedge fund allocation will be based on responsible investing,” concludes Hernandez. 


1 https://www.aima.org/sound-practices/due-diligence-questionnaires.html 
2 https://www.unpri.org/events/launch-of-the-first-industry-standard-responsible-investment-ddq-in-hedge-funds-new-york-2017-06-13-187/register 

 

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