Swedish hedge fund boss says clients balk at ESG risks

A $2.5 billion Swedish hedge fund manager says clients would like to put their money into sustainable investing strategies but are unsure of the potential trade-off when it comes to returns.

Serge Houles, managing director and chief client officer at Stockholm-based IPM, said there's not enough information about the impact on returns of switching to investments based on environmental, social and governance goals.

"The trade-off between risk, alpha and ESG is still not well understood, for instance, in the case of long-short portfolios," Mr. Houles said in an emailed comment.

IPM, which along with roughly 3,000 other asset managers and owners is a signatory to the Principles for Responsible Investment, recently hired portfolio managers from Goldman Sachs to help build its alternative risk premium strategies. Mr. Houles said IPM "will incorporate ESG factors both at the macro and micro level."

Last year, IPM was named the best large-cap commodities trading adviser over a five-year horizon by CME Group and BarclayHedge. But IPM's systematic macro strategy is suffering its third year of losses, and the fund manager wound down its value based long-only equity business in 2019, citing a challenging environment.

Mr. Houles said clients are "hesitant to sacrifice the promised alpha from absolute return strategies." So they "stay on the sideline."

The lack of standardized data in the world of ESG threatens to stall growth in the field as some investors start to question what's behind the label. The European Union is in the process of rolling out a new taxonomy to help bring more transparency, and last week business groups, including the Big Four accounting firms, came together to push for single ESG standards.

But influential regulators in the U.S. have warned money managers that their fiduciary responsibility remains to ensure that clients get the best return, irrespective of ESG considerations.

Mr. Houles said change is clearly under way, with an "increasing number" of investors making ESG a standard part of their due diligence before allocating funds. But that demand is currently driven by "conviction," he said. The "link between alpha and ESG is still weak."

Elsewhere in the hedge fund industry, managers have experienced growing pressure from institutional clients such as pension funds to provide more transparency about their ESG strategies.

Erik Eidolf, CEO of Stockholm-based hedge fund Nordkinn Asset Management, said he's "seen an accelerating trend of our institutional investors requesting more granular information about how we implement sustainability."

But Mr. Eidolf also warned that ESG is going mainstream, and said asset managers can't afford to ignore it.