Investor demand and increased education are needed before the incorporation of sustainability issues becomes mainstream in hedge funds, industry experts said.
Speaking at the annual United Nations-backed Principles for Responsible Investment PRI in Person conference in London on Thursday, hedge fund managers said they had not experienced investor demand for the incorporation of environmental, social and governance issues into strategies.
“My experience so far has been no expectation at all,” said Larry Abele, founder and CEO at Auriel Capital. “I have never had a prospect asking an ESG question.” Mr. Abele said investors have asked generally about the governance of the hedge fund management firm itself, “but never of our strategy.” He attributed it in part to a “mismatch in horizon … the typical hedge fund investor probably is looking to hit a new high watermark every 18 months. It is difficult to make these really slow-moving ESG type factors effective in an absolute-return strategy.”
Mark Jones, co-CEO at Man GLG, agreed that his firm had received questions on an institution level, but not on strategy, “unless it is one of the specialist funds.”
Akila Prabhakar, deputy ESG and impact officer, Mariner Investment Group, said while investors had asked about only the management of the hedge fund itself, rather than the investment strategy, another change has come about in the U.S. “A number of consultants are asking about it, whether ESG is integrated,” and how the manager trades on to ESG issues. Ms. Prabhakar said it is either that the consultants think it is important to the investment process, or it is coming from client demand.
Ms. Prabhakar said some clients were concerned when Mariner became a signatory of the PRI, because they associate ESG with lower returns. “There is an education gap,” she said.
Mr. Jones said progress is “relatively slow-moving at the moment,” and that it will take client demand or managers “to be clear that this is improving (their) returns.”
“If investors demand it, hedge funds will accommodate it,” Ms. Prabhakar added. “And education (is necessary) on both sides.”
Mr. Abele said: “The hedge fund industry, if we have one thing going for us, it is single-minded focus on performance. Some hedge fund managers are probably frightened that ESG will limit their ability” to produce returns, and will install boundaries in terms of investment. “Our experience is the opposite,” he said.