Hedge funds and responsible investment would seem to be an oxymoron but, globally, they have allocated at least $59 bn to the approach, according to a survey by the Alternative Investment Management Association (Aima) and the Cayman Alternative Investment Summit (Cais).
The survey of 80 asset managers with a collective $550 bn in hedge fund assets under management provides evidence of an increasing level of demand for responsible investment across the hedge fund industry.
Around 40 percent of respondents say they are already investing using responsible investment principles, with total assets in such investments worth $59 bn – a little over 10 percent of the respondents’ combined hedge fund assets under management.
Significantly, one in five firms say they are now committing at least 50 percent of their firms’ assets to responsible investments. Moreover, firms say they have seen a roughly 50 percent increase in demand from either current or prospective investors in the past 12 months: more than 70 percent of North American firms report increased investor interest in the last year, while half of European firms report the same.
In order to meet a growing investor appetite, about 40 percent of firms have either already hired a responsible investment specialist, or are planning to do so.
The practice of responsible investment is most prevalent among larger firms: around 80 percent of companies with $1 bn or more in hedge fund assets report an increase in their responsible investment capabilities, compared with a third of sub-$1 bn firms.
But among the smallest firms, those with $100 mn or less in assets under management, around a quarter invest a majority of their assets following responsible investment principles, indicating the emergence of a number of specialist responsible investment hedge fund firms.
Around 38 percent of firms surveyed use ESG factors to evaluate investment opportunities, while 18 percent have adopted SRI investments via the negative screening of companies from their investment portfolio. A further 5 percent of those who responded to the survey say they engage in impact investing.
The report – From niche to mainstream: Responsible investment and hedge funds – also casts light on the challenges firms face when looking to incorporate responsible investment into their investment strategies. The two most commonly referenced issues, cited by almost half of all respondents, are ‘inadequate methodologies for the calculation of sustainability risks’ and the ‘lack of relevant disclosure from companies’.
Aima’s CEO Jack Inglis says in a statement: ‘Responsible investment is becoming increasingly important to the hedge fund industry and firms are responding to investor demand by investing in the data and expertise they need in order to accurately measure the social and environmental dimensions of their investments.
‘As such investments become more sought after, these additional fiduciary duties require managers to ensure they have a very clear understanding of their clients’ investment objectives. In the coming years we expect the industry to be very innovative in matching up the need to deliver on investors’ deeply held beliefs while continuing to deliver on the goal of providing superior risk-adjusted returns.’
Tony Cowell, partner and head of asset management for KPMG Cayman Islands and co-chair of the editorial committee for Cais, adds: ‘The same transformation that is occurring in the traditional asset management industry is now happening in the alternative investment industry as well. This sector is only going to grow in importance as more hedge fund managers and investors work together to make an impact.’
