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Emissions-focused hedge fund reaps rewards for Trium in battle against climate change

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Launched in September 2019, the Trium ESG Emissions Impact Fund uses a market neutral long/short investment strategy to target high-emitting companies in hard-to-abate sectors – such as energy, mining and chemicals – where successful transformations in the form of decarbonisation and lower CO2 emissions can offer attractive long-term returns.

Launched in September 2019, the Trium ESG Emissions Impact Fund uses a market neutral long/short investment strategy to target high-emitting companies in hard-to-abate sectors – such as energy, mining and chemicals – where successful transformations in the form of decarbonisation and lower CO2 emissions can offer attractive long-term returns.

The Fund is led by portfolio manager Joe Mares (photographed above), a financial markets veteran of almost 25 years, who previously managed a global long/short equity portfolio at Société Générale. That followed stints at high-profile hedge funds Moore Capital and GLG, where at the latter he had been lead equities and commodities analyst for star manager Greg Coffey. Mares began his career at Morgan Stanley in 1997, specialising in equity research for the energy and shipping sectors.

So far this year, the Trium ESG Emissions Impact fund – which manages around USD100 million in assets in a daily liquid UCITS format – has generated uncorrelated returns in the face of stock market volatility and soaring energy prices. Since launch, it has had a -0.29 correlation and a -0.06 beta to the STOXX Euro 600.  

The Fund is one of a number of liquid hedge fund and alternative investment offerings from Trium, a family office-backed asset manager based in London, which also include quantitative equity, macro and market neutral funds.

Starting from scratch

Reflecting on the early days of the strategy, Mares says that while there was a sizable amount of ESG long-only product at launch, the amount of market-neutral strategies focused on ESG was, and still is, limited.

He believes that most hedge funds, regardless of their strategy – be it global macro, convertible arbitrage or merger arbitrage – find it tricky to retrospectively incorporate ESG or climate change as the main driver of what their strategy is trying to accomplish.

“We decided we were going to start from scratch and set up a fund that actually has ESG as its core purpose,” Mares tells Hedgeweek. 

“Our view was that of the roughly USD4 trillion of hedge fund assets out there, at least some of the people invested in that, in market neutral, were going to be also interested in environmental and social goals,” he says of the strategy’s origins. Today, the Fund’s investor base comprises over 30 or so clients, diversified across a range of mostly European institutional clients.  

“We felt that if climate change is going to take decades to fix, and during that time we’re going to have multiple bull and bear markets, then we should try to create a product which could actually survive a bear market.”

To successfully execute that approach, Mares and his team decided early on to focus exclusively on high-emitting industries and sectors, such as energy, mining, industrials, and agriculture, where certain hard-to-abate sectors – like aviation, steel, and chemicals and transport industries – face particularly high decarbonisation costs.

In terms of investment opportunities, the Fund looks to identify improvers and transformation stories – those companies that are able to decarbonise most effectively within their respective sectors. 

“That’s where the problem is,” he adds. “90 per cent of the problem is coming out of 30 per cent of the sector.

“We may sometimes buy clean tech stocks, and we may sometimes buy ESG stocks with very, very high ratings. But generally we’re focused on companies that are transforming – we are trying to buy companies that are going to be great stocks in three or four years, from an ESG perspective, rather than today. That gives us a very different shape of portfolio. 

“We will also short stocks. Sometimes we will be short oil stocks, sometimes steel stocks – we are trying to be sector neutral,” he continues.

“We’re not trying to run a portfolio that’s long utilities, short energy, or long industry, short mining. We’re trying to find within each sector those who are going to be the leaders in the decarbonisation process.”

Pathway to change

The portfolio comprises mostly medium-sized stocks, and the team looks to engage with company management where possible. While giants like Shell and Exxon have garnered considerable column inches in recent times, Mares is resolute on the strategy’s mid-cap focus. 

“Transformations of companies of that scale are extremely difficult,” he observes. “We believe many of the more successful and rapid transformations can happen in more medium-sized companies.” 

Expanding further on this point, he continues: “We’re not trying to find the best renewable stock, or the best electric vehicle stock. That’s probably 90 per cent of the media attention, but if you actually look at where the emissions are coming from, large chunks are coming from the sectors that are not going to get fixed by renewables or electric cars.

“Instead, we focus on steel and cement, and pulp and paper, and some of these other sectors – such as fertilizer – which we think are not as well-understood in terms of the transition pathways, and where there are higher barriers to entry, but where there are many more opportunities when companies actually do find that pathway to change.”

So as the ESG juggernaut continues to gather momentum, with an assortment of high-profile hedge fund managers now leading the impact investing charge, what sets Trium Capital’s ESG Emissions Impact strategy apart from the pack?

“We always get asked who our peers and our competitors are, and the reality is there are a handful of them and we are all doing slightly different things,” Mares says.

“One of the differences for us is that we are very focused on being strictly market neutral. Secondly, if you look at what’s in our long book, it doesn’t overlap that much with what’s in the typical ESG long-only fund’s long book.

“In general, the hedge fund industry has a very rapid turnover of positions. I’d say if there’s a very rapid turnover of positions in your book, it’s hard to argue that it’s being done with an ESG criteria, that an ESG criteria is driving that.

“We are talking about transformations that are going to take years. The hedge fund industry is generally not set up to basically underwrite ideas for multiple years.”

This approach has ultimately helped the strategy’s performance stay uncorrelated from the broader market. 
Warming to this point, Mares continues: “A typical energy transition fund is focused much more on financing renewables projects. But we would argue that those will offer fixed income-type returns. To get equity returns, you have to attack some of the harder problems, which is what we look to do.

“Certainly for the companies that we’re in – those hard-to-abate sectors, whether it’s cement or steel – they’re going to require a much higher carbon price and energy price to transform themselves, and I think we’re starting to see that,” he says of this year’s soaring energy prices. 

“All else being equal, having high energy prices – high prices for natural gas, oil and coal – is going to assist the energy transition.”

He adds: “Finally, so much of the move over the past 20 years in all investing has been about data, quants, AI. That has its place in ESG, and can be incorporated from an ESG perspective, but what we are doing is individual stock-picking,” he explains. 

“We try to evaluate each company, and how they can transform themselves, and it’s very hard to get a computer to do that for you – it’s very hard to do that using historical datasets and running back-tests, because, frankly, the companies are literally changing now, and the regulation is changing as we speak.”

Here and now

Talk inevitably turns to the COP26 climate summit taking place in Glasgow, described by some as the world’s last best chance to meaningfully address the environmental crisis. While Mares is hopeful the event will dictate the direction of travel among governments and economies, he believes challenges remain around effective implementation.

Mares says his team are more focused on specific national regulations – such as the US infrastructure bill and various EU proposals – rather than the longer-term objectives at COP26, such as net zero by 2050 or 2060.

“The challenge of COP, rather than with the EU or national governments, is that it is hard for them to have an enforcement mechanism,” he notes. “Ultimately what matters is the action, not the commitments, and they need at least all of the largest economies to work together to achieve those goals.

“We’re much more focused on the here-and-now, rather than on long-term goals, because you’re not going to get to the long-term goals without the here-and-now.”

Over the long run, Mares maintains the Fund stands to benefit from “tremendous regulatory tailwinds”, pointing to the range of ways the EU and US are driving investors towards decarbonisation.

“Regulators want to do it with new technologies, with new products, and with new arrangements with customers on how they pay,” he says. “We’re trying to capture what I would describe as a tailwind, which is occurring over years, but in the short-term, you often have hurricanes going in the other direction.”

He points to the stock market fluctuations over the past 18 months, which ultimately had little to do with decarbonisation, and was more driven by a once-in-a-lifetime pandemic.  

“Yes, there was an environmental component to that, but clearly it wasn’t the dominant driver of the government response,” he concedes. 

“So while we have a tailwind for many years in this strategy, we’re like anyone managing money – in the short term, ESG is not always the dominant driver of what makes stocks go up and down every day. It’s not going to just be a straight run for the next 30 years in terms of decarbonisation.”

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