Sustainable alpha: How a French commando-turned-hedge fund chief is navigating the ESG “fog of war”
A year after launching Atlas Global Investors, a traditional long/short fundamental equity hedge fund with a core responsible investing focus, Quentin Dumortier is convinced that ESG (environment, social and governance) themes are more important than ever for investors.
The Atlas founder & CIO, who rolled out the absolute return long/short strategy in early 2019 and is now preparing to launch a long-only product in the coming weeks, believes that in combination with fundamental attractiveness, sustainability is now a crucial factor in generating long-term performance.
The firm’s Atlas Global Opportunities Fund focuses on developed market equities, building its portfolio around eleven structural sustainable investment trends - including clean mobility, energy transition, smart cities, resource efficiency and water conservation.
“We want to capture a source of alpha which comes from being long the companies that are aligned with those sustainability trends, and being short companies that are either going against those trends or are worst in class when it comes to internal practices,” he tells Hedgeweek.
ESG factors and themes have become central to hedge funds’ investment considerations and operational processes in recent years as climate concerns become more prominent, with major names including Sir Chris Hohn’s TCI Fund, Caxton Associates, JP Morgan, and Man Group emerging as leading advocates.
Earlier this year, Deutsche Bank research found that ESG factors now shape the allocation decisions of almost two-thirds (60 per cent) of hedge fund investors, while Man Group said last month that responsible and sustainable investing is likely to maintain its momentum among investors, despite the pressures of the coronavirus crisis.
A sense of purpose
Dumortier notes how sustainability concerns are radically reshaping economies globally, with consumer and regulatory demands at their core, which in turn is driving the change in investors’ perspectives.
“We think that to generate absolute returns in a responsible way is something that also caters to the needs of traditional hedge fund investors. We strive to be as uncompromising and radical as we can.”
This spirited approach has proved to be a common thread running through Dumortier’s somewhat unique career path: before stepping into the world of asset management, the London-based manager had an illustrious career in the French armed forces.
Having served as a lieutenant in the French Marine Corps, and later as a captain in the French Special Air Service regiment, heading commando teams for special operations across three continents, Dumortier believes that qualities honed in the military - such as discipline and focus - stood him in good stead when he switched to a career in finance.
“We’re on a mission, and the entire team shows relentless focus to achieve our ambitious goals. We also share a true sense of purpose,” he says.
“Both [investment management and military service] are also interesting in terms of the type of people you can attract,” adds Dumortier, who earlier worked at Abberton Capital and Edoma Partners before launching Atlas.
He believes the broad range of backgrounds in his team has allowed for a range of viewpoints and an avoidance of groupthink.
“Diversity is a must to provide unique perspectives, foster more in-depth dialogue, and eventually get a better understanding of our environment.”
Building the book
Atlas’s investment universe comprises around 350 potential longs and 350 potential shorts, with a total fund capacity of between USD500-600 million.
Dumortier believes that companies which are aligned with those sustainable trends will benefit from superior growth over time, and will tend to be awarded a valuation premium.
“We are fundamental, bottom-up stock-pickers; what matters to us is responsible investing and returns, and for us it’s about reconciling thematic top-down views with rigorous bottom-up analysis of companies.”
Delving deeper into the portfolio-building process, Dumortier maintains that responsible investing means looking far beyond what he sees as the static, self-reported datasets of ‘ESG 1.0’.
When defining its investable universe, Atlas scores companies on 26 long-term sustainability KPIs, and aims to capitalise on short term dynamic signals stemming from 100,000 external sources to get a sense of ESG momentum.
As part of its research process, the firm has assembled dedicated expert panels to go beyond systematic screening and include human judgment in the ESG validation process.
“Most people tend to rely on external third-party consultants to rank their portfolios according to some ESG metrics, to ensure they’re more ESG than an index. But when one puts a universe of stocks through the systems of five or six data providers, the ESG results are all over the place,” he says.
“For me, it’s not about having some random ranking. You have to go one step further – it’s about doing more independent research into the companies and harness the power of collective intelligence to improve our judgment and build a truly responsible investment strategy.”
Amid the search for stocks that are in line with sustainability, ESG-focused investing also leads to particularly attractive ideas for short positions.
“The idea is to call the bluff between what companies say, and what they actually do. We believe that consumers, regulators and market participants will increasingly punish companies that are not truly ESG compliant, or those active in non-sustainable trends,” he explains.
Ambiguity and opportunity
Dumortier is also keen to weigh in on the continuing debate over whether taking short positions in companies can ever be ethical for a strategy dedicated to responsible investing.
“We’ve had some discussions with people who argue that if you’re truly socially responsible you should not short. Some people take issue with the fact that funds are shorting, and feel that betting against a company is something that’s morally wrong.
“But to me there’s always a buyer and seller, and I believe that if you put pressure on stock prices of companies, then management tends to take note and correct it by doing the right things. We certainly engage with management teams and always share our thoughts in a constructive way.
“Like investing in general, ESG is not static. It’s all about momentum, and often it’s about finding out which companies are bad but may become better so that we can invest in them.”
Against this backdrop, Dumortier is keen to underline the need for having the right investor base which is aligned on core values and principles. Atlas’s fund was launched with the backing of a family office which is heavily focused on responsible and sustainable investing.
“In the long-only world, the conversation is done, and everyone is ESG. Hedge funds are starting to embrace that in earnest, but some people often believe that for hedge funds ESG is either a constraint or a marketing gimmick,” he says of the prevailing allocator sentiment.
He points to one “very frank discussion” with a large North American pension fund investor which had embraced ESG in their portfolio, but when it came to their specific hedge fund allocation, they felt ESG represented a constraint.
“They felt that the more unconstrained their hedge fund investments were, the better.”
Looking ahead, Dumortier suggests that in 12-18 months’ time, most funds will define themselves as ESG-friendly – but adds that, ultimately, this sphere has yet to be properly defined.
“There is a lot of lip service being paid to it right now - a lots of hedge funds have become ‘ESG’ almost overnight,” he says.
“There is still a lot of confusion and ambiguity around ESG. But when there’s ambiguity, there’s opportunity, and Atlas is well prepared to find its way through this ESG fog of war.”