Albourne Partners has been around for a quarter-century and advises institutions who collectively invest more than $500 billion in alternative assets.
So when Albourne this month, for the first time, made it mandatory for the roughly 650 hedge funds one of its teams monitors to answer questions about their approach to environmental, social and governance issues, it highlighted a shift the industry is struggling to cope with but can't afford to ignore.
While the change also applies to other types of alternative asset managers (like buyout firms) under Albourne's purview, hedge funds by their very nature are somewhat ill-equipped to handle the rising emphasis on ESG in investing. Some trade in and out of securities in as little as microseconds, and the ability to make unconstrained investment decisions — including so-called short bets — is essential. Taking ESG into account adds a layer of complexity for a $3.1 trillion industry that for years has grappled with subpar returns.
It's a simpler equation for long-only investors. Don't like a company for its poor ESG practices? Don't buy its shares. But are you allowed to sell short the same company — and potentially profit — from those same lax principles if the stock falls?
Whatever the merits of imposing additional ethical constraints on hedge funds, the pressure is building. And it's coming from the pension and endowment funds that have become increasingly important sources of capital in the decade following the global financial crisis.
"In the last 12 to 18 months, I've started to feel we've reached a sort of a tipping point of alternative managers really taking ESG seriously," said Edward Mason, the head of responsible investment at Church Commissioners for England, the entity tasked with managing the Church of England's £8.3 billion pound ($10.8 billion) endowment fund. "If a manager isn't doing this, they're in danger of being left behind."
Church Commissioners for England has what it terms an "exclusion list." It's been in place since 1948 and now spans weapons, pornography, tobacco and gambling, along with high-interest rate lending and thermal coal extraction. Just under 10% of the endowment fund is allocated to hedge funds, and the church won't consider putting money into any fund or strategy that can't meet its requirements. Its "sin list" applies to both bullish and bearish investments, and even index-related derivatives.