ESG is one of the hottest topics in the investment industry today. ESG adoption has been years in the making, and hedge fund managers have finally started to take notice. We have spent the last three years working with investment managers to understand their ESG approach. As you might imagine, the application of ESG in hedge funds is just as varied as the investment strategies they employ. The wide range of ESG strategies has created complications for investors. Until now, there hasn’t been a common language to aid investors, managers, and other stakeholders in their conversations about their ESG hedge fund investments.

After meeting with many hedge fund managers, it is clear that understanding the application of ESG by an individual manager requires in-depth due diligence and ESG expertise. Complicating the matter, there is no silver bullet for allocators to quantify how a given hedge fund uses ESG. There is not a single score or rating system that can comprehensively relay all the information needed to assess a strategy. While many hedge funds claim to incorporate ESG, it may be difficult to determine how well they do so versus their peers without doing the work.

There are managers that may invest in so-called “dirty” or “brown” companies. These companies have high carbon intensity according to publicly reported measures, but the manager has done their own due diligence and can see that the company has taken steps in reducing its carbon intensity, which has not been reflected yet in the data. This is just one example of how contemporary scoring systems cannot capture the whole picture.

Instead of a scoring system, we developed a classification framework to assist allocators in categorizing ESG hedge funds based on their investment process. The classification framework is meant to be used as a starting point and in combination with ESG and investment due diligence. By making funds classifiable and comparable, we aim to facilitate communication – between asset managers and their clients, asset owners and their boards and stakeholders, and fund managers and their investors.

Hands-on due diligence is required to truly understand and quantify how an investment manager integrates ESG, so we do not attempt to grade or opine on how well a manager integrates ESG. The framework is not designed to measure or rank a manager based on their impact on the world. Instead, it was created to assist in the initial categorization of funds, which then allows ESG investment professionals to explore and determine a manager’s level of ESG sophistication.

ESG Thematic Hedge Funds

ESG thematic hedge funds screen their investment universe based on specific predetermined themes, such as climate change, resource efficiency, sustainability, or energy transition, among others. Thematic managers may also use ESG integration techniques as a secondary factor.

ESG Integration Hedge Funds

ESG Integration hedge funds screen their investment universe using specific ESG criteria to conduct investment research. Some criteria include ESG scoring systems, positive or exclusionary screenings, or ESG risk management processes.

The framework initially divides funds into two main ESG categories – Thematic and Integration. The two categories allow us to understand if a manager is focused on investing thematically, aligned with specific environmental, social, or governance objectives, or if their strategy incorporates ESG factors throughout the investment process.

Thematic ESG hedge funds tend to screen their investment universe based on specific predetermined themes, such as climate change, resource efficiency, sustainability, or energy transition, among others. Thematic managers may also use ESG integration techniques.

ESG integration comes in all shapes in sizes. It can be as simple as negative screening for a company’s product such as tobacco. Or it can be as complex as creating an in-house proprietary ESG scoring system that analyzes their investment universe across a variety of factors.

The framework’s next level of classification organizes funds by their investment strategy. The second level is divided into five categories: Fundamental, Systematic, Macro, Arbitrage,or Fund of Funds. Coupling the ESG classification of Thematic or Integration with the above investment categories gives us the basis of our framework. We’ll revisit Macro, Arbitrage, and Fund of Funds shortly, as understanding the delineation between Fundamental and Systematic fund strategies—the largest subcategories—is critical.

Fundamental strategies utilize core economic, financial, and ESG data to determine intrinsic values and make investment decisions. In contrast, systematic strategies quantitatively employ ESG and financial data to make trading decisions in a rules-based system.

Fundamental Strategy:An investment strategy whose theses are based on firms’ financial statements, in both absolute terms and relative to other similar securities, as well as market indicators. Generally, these funds are of a bottom-up and discretionary nature.

Systematic Strategy: A rules-based, non-discretionary investment strategy that uses various advanced quantitative methods to implement trading and investment decisions.

This distinction is made because of the ESG data that is used in systematic strategies. As the old adage states, “Garbage in, garbage out”—The ESG data currently available is still in its infancy and cannot always be relied on unconditionally. This is not to say the individual sets of data are bad but rather that consistency is lacking because of the varying ESG reporting and materiality standards across the world. To further muddle matters, the data is then collected and combined by rating agencies based on their own methodologies. The data companies have the same intention of producing reliable, consistent company-level ESG data and scores, but as research has shown, scores for the same company provided by two different rating agencies may be completely uncorrelated. This inconsistent and, at times unreliable data coupled with the systematic strategies’ data dependence requires the funds to be separated from the more flexible fundamental strategies.

On the other hand, fundamental analysis allows for nuance in ESG approaches, data, and scores. The facts and figures can be analyzed in context by the hedge fund manager for a tailored approach. This does not mean that a fundamental approach is better than a systematic approach but rather it demonstrates the flexibility of a manager to do their own ESG anfalysis.

There may be exceptions to the framework, but that is why the ESG due diligence team’s knowledge and ability is critical to understand the nuances and expertise of a manager, no matter how they implement their ESG strategy.

While dividing funds between Thematic vs. Integration and Fundamental vs. Systematic coversmost ESG hedge funds (e.g., equity hedge, event-driven, quantitative equity, etc.), other hedge fund strategies, such as Macro, Arbitrage,and Fund of Funds, must also be considered. To address this, the Framework includes thematic and integration classifications specifically for macro strategies, arbitrage hedge funds, and fund of funds.

Macro Strategy: Macro managers trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency, and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top-down and bottom-up theses, quantitative and fundamental approaches, and long and short-term holding periods.

Arbitrage Strategy: Relative Value and other arbitrage strategies have an investment thesis that is predicated on realizing a value discrepancy in the relationship between related securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and securities range broadly across equity, fixed income, derivative, or other security types.

Fund of Funds Strategy: Fund of Funds invest in multiple hedge fund managers across strategies and may focus on investment strategies such as opportunistic, diversified, or defensive.

The HFR ESG Hedge Fund Classification Framework is designed to help hedge fund allocators and their stakeholders better understand how ESG fits within their hedge fund portfolio. We also hope that it allows hedge fund managers and their investors to compare and classify ESG hedge fund strategies. The framework does not grade a manager’s ESG quality, since ESG hedge fund strategies are so varied, and assessing manager ability requires due diligence. However, these categories can provide a common language that facilitates communication and reporting across stakeholders. The classification framework is just the beginning, a starting point for deeper ESG due diligence and investment research, but we also hope that starts deeper conversations about incorporating ESG into hedge fund investments.

Contact the Author

Gregory Neal, Director | investments@hfr.com

Learn more HFR投資について at: hfr-investments.com or reach out to investments@hfr.com

A downloadable copy of this article may be found here.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer, to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is confidential and is intended solely for the information of the person to whom it was delivered. It is not to be redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and examples may not be suitable for all investors. References to specific strategies are for informational purposes only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors, conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any determination to invest in any of HFR’s funds.

©2022 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are the trademarks of Hedge Fund Research, Inc.

The post ESG Hedge Fund Classification Framework appeared first on HFR Investments.

As of this piece’s publication, it’s been a bad couple weeks for hedge funds in short positions; specifically, it was
a historically terrible rout for some funds who were caught in short positions on brick-and-mortar retail,
cinema, and legacy tech equities with extremely high short interest.[1] But despite monumental
losses in a number of particular funds, hedge funds are going to keep on doing what they were originally invented to
do: produce uncorrelated returns with the flexibility to express long or short investment theses.^[2]
Given that, if we are to expect widespread ESG adoption across the hedge fund industry, there needs to be a wider
embrace of shorting from an ESG perspective.

The lion’s share of assets managed worldwide with an ESG focus are driven by investment screens: According to the
Global Sustainable Investment Alliance’s biennial Global Sustainable Investment Review, assets managed through
negative or exclusionary screens accounted for $19.8 trillion of the total $30.7 trillion sustainably managed assets
worldwide in 2018.^[3] In other words, a large majority of sustainably or responsibly managed
assets are long-only, with securities that are selected (or rejected) based on how well they score on ESG metrics.
While the 2020 GSIA Global Sustainable Investment Review has yet to be released, we expect a similar breakdown of
assets.

For ESG to truly reach its maturity as a developing strategy, some investors—particularly hedge funds—need to
consider incorporating ESG shorting into their portfolios. Broadly, ESG investors expect that in the long run
securities well-rated by ESG metrics will outperform, while poorly rated ones will underperform. But by restricting
the scope of ESG投資 to long positions, we limit the ability of investors to express profitable
bearish attitudes towards stocks with unpriced ESG risks. It also precludes investors from
hedging against downside risk on an ESG basis. Lastly, ESG shorting has the potential to
enact positive transitions through debt and equity markets. As demonstrated by the highly publicized short battle
over Valeant Pharmaceuticals (now Bausch Health), such pressure can prompt meaningful change.^[4]

Capturing the Upside and the Downside of ESG

From an absolute return investor’s perspective, ESG shorting is critical because it allows them to
capture both the upside and the downside of their investments while incorporating ESG
factors. For example, many ESG investors point to increasingly stringent global climate
initiatives, arguing that these changes will eventually create headwinds for the oil and gas industry. Should they
not be able to capture positive returns from this thesis? Due to the plummeting cost of renewables alone, it’s easy
to imagine a somewhat near future where some energy producers who rely exclusively on extracting fossil fuels
struggle to compete: In this scenario, some firms will transition to survive, many will consolidate, and some even
go under, drowning in stranded toxic assets such as extraction and refining facilities.<^>[5]

According to a study by Financial Times Lex, if governments worldwide implemented stricter climate measures
to limit the rise in temperatures to 1.5° Celsius above pre-industrial levels for the rest of this
century, it would amount to around $900 billion in stranded assets. At the time, this
equaled about a third of the market value of large oil and gas firms.^[6] Investors always go
where they can make money, so it’s not hard to imagine that investors may want to take short positions in this
circumstance, whether it’s to make money, do “the right thing,” or a mix of both.

ESG Hedging against Downside Risk

Unlike positive alpha, which is harder to consistently link to an isolated ESG factor, researchers have proven that
worse ESG ratings correlate with increased default risk. According to a working paper published by researchers at
the University of Giessen, “ESG score reduces firm risk, both for U.S. firms and for European firms.”^[7] Their analysis of 1-year and 5-year CDS spreads and distance-to-default also found
that “ESG efforts significantly reduce market-based default risks in the U.S. sample.” In the U.S. market
particularly, increased ESG activity (i.e., social responsibility efforts) correlates with reduced default risk.
Hence, going long on higher ESG scorers can lower risk, while going short on poor ESG scorers could
potentially shield against downside risk.

Firms with a track record of ESG issues, especially scandals and governance issues, have been shown to correlate with
negative alpha. Simon Glossner of the University of Virginia constructed a “value-weighted U.S. portfolio of
controversial firms with a known history of ESG incidents,” and found that it had a “a four-factor alpha of negative
3.5% per year,” even after controlling for other risk factors, industries, and firm characteristics.^[8]

There are clear risks in ignoring the governance portion of ESG. Scandals, cover-ups, and fines are perhaps the
easiest place to see the financial impact: It took over two full years for Volkswagen’s share price to recover after
its diesel emissions test cheating scandal; Wells Fargo paid billions to settle its fake accounts scandal, but its
reputational damage was the real cost; and Enron’s falsified earnings led a meteoric rise to a $70 billion market
cap and dramatic fall to bankruptcy. Prominent short-seller Jim Chanos made a name for himself by shorting Enron the
whole way down, netting his fund $500 million. Of course, uncovering such scandals is easier said than done, but
paying attention to governance factors—particularly, a lack of transparency and accounting issues—is often the place
to start.

Creating Positive Change by Shorting

Short positions can also be utilized to pressure executive boards to make strategic changes. While short position
holders have no voting authority, management still pays attention to them, even if it is out of ire: “Managers of
firms don’t like people who short sell their stock, especially if the short sellers are accusing the firms of fraud
and even more especially when the fraud accusations are true,” says economist Owen Lamont.^[9]

While it’s hardly a surefire strategy for friendly engagements with management, sometimes it works, especially in
cases where the short sellers put reputational pressure the firm by uncovering issues management would rather hide.
Short sellers played a key role in publicizing the nature of Valeant’s drug pricing policy, which lead to Senate
hearings where Valeant stood accused of price gouging sick and vulnerable people, followed by the ousting of CEO
Michael Pearson.

“Socially responsible short selling could even be used to uncover ‘greenwashing’
by supposedly well-rated ESG firms that are misleading investors about their environmental impact.”

Even if these short sellers weren’t necessarily coming from an “ESG perspective,” the results were the same, and it’s
easy to imagine how these tactics could be used to pressure ESG bad actors (e.g., polluters, labor exploiters, etc.)
to correct course. Socially responsible short selling could even be used to uncover “greenwashing” by supposedly
well-rated ESG firms that are misleading investors about their environmental impact.

Conclusion

ESG has long been the domain of long-only investors. In fact, there’s even some disagreement on whether taking a
short position at all is compatible with ESG principles. However, shorting can be a viable strategy for achieving
the goals of ESG investors: lessening carbon footprints, uncovering lapses in proper governance, and raising the
cost of capital for ESG laggards, to name a few. Another goal of ESG investors is to encourage widespread ESG
adoption across all asset classes, including hedge funds—it’s Principle 4 of the UN Principles for Responsible
Investment. It would be a disservice to the wider project of socially responsible and sustainable investing to
exclude the bearish side of the market.

Contact the Author

Andrew Koski, Senior Analyst | andrew.koski@hfr.com

Learn more HFR投資について at: hfr-investments.com
or reach out toinvestments@hfr.com

A downloadable copy of this article may be found here.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds. ©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®,
HFRq®, HFRU, and HEDGE FUND RESEARCH are the trademarks of Hedge Fund Research, Inc.

[1]According
to Ortex, short sellers have lost $70.87 billion from their positions in U.S. equities as of January 28, 2021.

[2] Other hedgies made
hundreds of millions riding the short squeeze alongside retail investors.

[3] 2018 Global Sustainable Investment Review

[4] Of course, in this
case, the shorts need to produce positive meaningful change (e.g., pressuring a carbon intensive energy
producer to transition towards renewables).

[5]CEOs of the U.S. behemoths
Exxon Mobil and Chevron have reportedly discussed a merger.

[6] Alan Livsey, “Lex
in depth: the $900bn cost of ‘stranded energy assets’,” Financial Times, February 3 2020.

[7] Christina E.
Bannier, Yannik Bofinger, and Björn Rock, “Doing safe by doing good: ESG投資 and corporate social
responsibility in the U.S. and Europe,” CFS Working Paper Series, No. 621, Goethe University Frankfurt, Center for
Financial Studies, April 29, 2019.

[8] Simon Glossner,
“The Price of Ignoring ESG Risks,” May 18, 2018.

[9] Owen A. Lamont,
“Short Sale Constraints and Overpricing,” in Short Selling: Strategies, Risks, and Rewards, edited by Frank
J. Fabozzi, 2004, pp. 183-4.

The post The Socially Responsible Short appeared first on HFR Investments.

This is an incredibly exciting time for ESG hedge funds, launches have spiked in 2020 and are expected to grow
through the next several years. These types of funds implement ESG specific hedge fund strategies, such as a
“carbon neutral long/short equity fund” or an “energy transition event driven credit
fund”. I believe there is tremendous opportunity out there, and these managers will outperform, either
because of structural ESG tailwinds or due directly to ESG-related alpha. However, I do know there are many “ESG
skeptics” out there, and I plan to present an alternative view of ESG hedge funds.

Let’s take a step back and look at these new funds in two ways:

1) Emerging managers

2) Innovative new strategies

When looking at emerging hedge fund managers, ESG or otherwise, the academic literature has provided evidence that
these managers outperform their more established peers – most notably from “The Performance of Emerging
Hedge Funds and Managers” (Aggarwal and Jorion 2007). The data indicates that incentive effects are
stronger for emerging managers because of the lower initial wealth any marginal increases in profits create a
greater impact. Also, because of their size, they are more nimble than established managers thus being able to
quickly take advantage of investment opportunities.

Being able to classify ESG hedge fund managers as emerging gives us our first positive indication that ESG hedge
funds will outperform more established managers. Generally, the outperformance of emerging managers is a strong case
to invest in ESG hedge funds, but I do understand that may not be sufficiently compelling. I want to take it one
step further and bolster the argument with evidence from new research, which demonstrates that emerging managers
with “Innovative Strategies” will outperform.

New Emerging Hedge Fund Manager Data

In a paper from July 2020, “The Economics of Hedge Fund Startups: Theory and Empirical Evidence,” Charles Cao, Grant
Farnsworth, and Hon Zhang offer compelling evidence that there are specific sub-sets of emerging managers that
outperform. They looked at three characteristics of the emerging fund: (1) the popularity of the fund’s strategy
based on investor demand (Hot v. Cold); (2) if the fund was part of a fund family at an existing firm; and (3) if
the investment strategy is a clone strategy—a strategy that already exists or is set up in a similar way to attract
new assets.

The authors posit that “these results provide strong support to the prediction that superior-performing new hedge
funds can be identified ex ante based on an understanding of the effects of investor demand and family
structures” (Cao, Farnsworth, and Zhang 2020). Though I take anyone saying that they can identify anything ex
ante with a grain of salt, all three of these characteristics can be helpful in understanding and breaking down the
outperformance of emerging managers.

While the data for hot versus cold inceptions and standalone versus family affiliated funds is fascinating, I’ll come
back to these topics in the future. Right now, I want to focus on the idea of non-clone strategies and how they can
be viewed in terms of ESG-focused hedge funds.

ESG as Non-Clone Strategies

Clone inceptions are fund launches that closely mimic an already existing strategy, essentially a means to gobble up
excess strategy demand. Conversely, a non-clone fund would implement a new innovative strategy and because of this,
the fund is expected to outperform, as noted by the authors: “We expect clone funds to deliver poorer
performance than non-clones.”

When I think of new and groundbreaking strategies, my mind immediately goes to ESG strategies, likely, because ESG is
where my research has been focused. Nevertheless, these are undoubtedly innovative strategies and include long/short
equity managers that focus on companies that contribute an impact aligning with one or several of the 17 Sustainable
Development Goals, or SDGs, created by the United Nations. There are funds that specifically focus on offsetting
carbon use and greenhouse gases in our atmosphere, as well as funds that solely focus on facilitating the energy
transition from fossil fuels to electricity.

These are not just noble pursuits but are also pioneering hedge fund strategies that the data suggests may lead to
outperformance. Selecting emerging managers comes with its own challenges, but I think this evidence is compelling
enough to allocate resources to the space. If you allocate to hedge funds and are still skeptical of the
return potential of ESG hedge funds, then try thinking of them as an emerging manager
with an innovative strategy.

As more resources are funneled into ESG and responsible investing research, we will soon have definitive academic
studies proving that specific ESG factors contribute to alpha. That day is quickly approaching, but until then, a
strong argument can be made for outperformance of emerging ESG hedge fund managers by using the available data and
viewing them through the lens of emerging managers with innovative strategies.

Contact the Author

Gregory Neal, Director of Investments. investments@hfr.com

Learn more HFR投資について at:

https://hfr-investments.com or e-mail us at investments@hfr.com

A downloadable copy of the article may be found here:

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds.

©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

The post Expanding the Approach to ESG Hedge Funds appeared first on HFR Investments.

The very idea of an ESG hedge fund might sound a bit oxymoronic. After all, sustainable investing is a particularly long-term strategy in its time horizons, whereas many hedge funds pride themselves on their nimbleness and ability to pivot in the moment. More cynically, hedge funds have (and perhaps always will be) focused exclusively on one thing: generating alpha regardless of market conditions. But as many have already realized, it is possible to put capital to work for a better world without sacrificing returns.

As traditional hedge fund allocators—particularly endowments, pension funds, and high net worth millennials—demand more ESG options, an increasing number of hedge funds will inevitably offer more ESG solutions out of necessity. The main driver of ESG adoption is, unsurprisingly, investor demand, as allocators large and small seek out more ways to put their assets to work in sustainable and responsible ways. After all, fledgling hedge funds need any edge they can get to win allocations these days; 2019 marked the fifth straight year where hedge fund liquidations exceeded hedge fund launches, according to Hedge Fund Research.^[4]

Hedge funds can offer something their active long-only and passive peers cannot: sustainable and socially responsible returns uncorrelated to stock and bond markets, investments suitable for an ESG mandate with upside and downside capture, and risk mitigation during periods of increased volatility (especially with an ongoing pandemic and a contentious presidential election on the horizon). Activist hedge funds have long used their influence to effect change and maximize shareholder value, so it is not by any stretch of the imagination to envision activist funds applying the ESG principles of engaged ownership to promote positive changes at their target companies. Many already are.

The demand for ESG suitable products is clear. European institutional investors have led the charge, with the vast majority surveyed (89%) now considering ESG related risks during the investment process, up from 55% in 2019.^[5] While U.S. investors have been slower to adopt, Deloitte projects that ESG-mandated assets could “could grow almost three times as fast as non-ESG-mandated assets to comprise half of all professionally managed investments by 2025.”^[6] The preferences of a rising generation of investors have also changed the expectations faced by fund managers. Millennials, between 24 and 39 in 2020, are entering their prime earning years as a generation, and surveys demonstrate that they value ESG factors significantly more than older generations. ^[7] Hedge funds have also taken notice: Over half of the hedge fund respondents in the KPMG-AIMA-CAIA survey said there had been “significant increase” in interest regarding their firm’s ESG capabilities or strategies over the prior 12 months.

There is a strong case to be made for the ESG hedge fund, but not simply because it is an easier path for them to win business—hedge funds are actually the best equipped to handle the challenges of developing ESG into a robust strategy with a measurable impact. Hedge funds are among the most sophisticated public securities investors,at the cutting edge of both quantitative and fundamental strategies, making them well suited to be at the cutting edge of ESG strategies as well. It is already being portrayed onscreen: The subplot of the current (5^th) season of the premium cable hedge fund drama Billions involves brilliant emerging manager Taylor Mason turning their fund into an ESG hedge fund. The story, albeit a fictional one, is far closer to reality than we realize, and it is far more believable some of the embellishments found in rest of the show.

While still in its infancy, ESG designated strategies have commanded strong inflows, particularly in the active management space, which has ceded ground to passive strategies over the ten-year bull run. Even still, it may come as a shock that one third to a half of all professionally managed assets in the world are truly sustainable or socially responsible. A clear issue in the rush to market funds as ESG-compliant is an inclination to greenwash strategies that in actuality have a very marginal ESG impact. Who is managing all these so-called ESG assets and how rigorously are they applying ESG criteria? Perhaps these numbers above ought to be viewed with some skepticism—depending on how broadly minimum ESG standards are applied, a fund could be counted as an ESG fund simply because it is managed by a United Nations Principles for Responsible Investment signatory, regardless of whether the fund itself explicitly focused on these issues.

Today there are over UN PRI 3,300 signatories, a number that has increased significantly in recent years. While this growth is an encouraging development for overall ESG adoption, the increasing ubiquity of PRI signatories necessitates a higher bar for investors seeking an ESG fund. The PRI has also faced criticism that its objectives may be too vague and ultimately unenforceable to meaningfully change behemoth financial firms’ behavior. Researchers Soohun Kim and Aaron Yoon published findings earlier this year that showed the impact of becoming a PRI signatory had much more to do with subsequent fund inflows than measurable ESG impacts and investment performance.^[8]

In June, the UN PRI announced new reporting requirements for signatories that seek to address such criticisms—in 2021, firms will be required to identify the targets and outcomes of their investments as they relate to the UN’s Sustainable Development Goals.^[9] Becoming a signatory cannot be just a marketing strategy. We all need to work together to ensure that our assets are having a real impact and hold one another accountable. But in order to do so, we will need to perform significant research to determine how to measure ESG impact concretely. Hedge funds can and should play a significant role in this research. While the UN Principles for Responsible Investment only recently turned its attention to hedge funds as a category, releasing its Technical Guide for ESG Incorporation in Hedge Funds in May 2020, some fund managers have been signatories for over a decade (HFRインベストメンツ is a UN PRI Signatory).

A significant issue in measuring the impact of ESG strategies is that ESG data is inconsistent, often self-reported, and without consensus amongst providers. A majority of hedge fund managers surveyed by KPMG-AIMA-CAIA agreed that a lack of consistent data is a major reason for their hesitance to adopt ESG strategies, with 63% reporting their “progress hampered by lack of robust templates, consistent definitions and reliable data.” Unsurprisingly, recent academic research agrees that there is little agreement in the ESG ratings offered by third party service providers. Researchers at the Geneva Finance Research Institute analyzed S&P 500 firms from 2013 to 2017 and the corresponding ESG ratings provided by the six largest ESG ratings providers, and they found that the average correlation between overall ESG ratings is about 0.46, while the average correlation for governance scores is only .19.^[10]

We need hedge fund managers to actively parse conflicting and incomplete data sets using their quantitative and fundamental skillsets. Until ESG data is further developed and standardized, how much faith can you place in a passive strategy that trades only on data that in some cases barely correlates with its peers? Investors agree: According to data from EPFR, active funds have seen steadily increasing outflows since 2008, while passive funds have seen consistently rising inflows, but inflows into active ESG funds have slightly outpaced passive ESG funds.^[1] Of course, there is room for all types under the ESG tent, as every investor has different goals and risk tolerances, but until ESG strategies are more codified, there will be significant demand for an active investment team and their analysis.

Despite opacity surrounding ESG’s measurable impact, the tailwinds in the strategy are here to stay. As the European Union plans their post-COVID recovery trajectory, policymakers have made it clear that they intend to build a “greener” economy going forward. In July the EU announced that a third of funds raised for the EU’s €750 billion COVID recovery package could come from green bonds, which will direct public investment spending towards sustainability-focused infrastructure projects.^[12] If the Democrats prevail in November, Joe Biden’s platform of similar sustainable infrastructure investment and green COVID recovery may be realized. State governments in New York and Rhode Island have already invested in wind farms on their coasts, with the Empire Wind (Equinor-BP) and Mayflower Wind (Shell-EDP Renewables) projects, respectively.[13]^,[14] On both sides of the Atlantic, government sustainability mandates will ensure tailwinds for ESG funds for years to come.

Throughout their history, hedge funds have been maligned—whether it is because they personify (to some) the greatest excesses of Wall Street, or because too many mediocre fund managers’ performance cannot justify their costly fees—but facing the current ESG demand , they have a chance to redefine themselves as an industry, by developing environmental, social, and governance criteria into a robust investing strategy, with a quantified impact and without sacrificed returns

Contact the Author: Andrew Koski, Senior Analyst | andrew.koski@hfr.com

Learn more HFR投資について at: hfr-investments.com or reach out to investments@hfr.com

Share this article on social media!

Disclaimer: This article does not constitute an offer, or a solicitation of an offer, to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is confidential and is intended solely for the information of the person to whom it was delivered. It is not to be redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and examples may not be suitable for all investors. References to specific strategies are for informational purposes only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors, conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any determination to invest in any of HFR’s funds.

©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are the trademarks of Hedge Fund Research, Inc.

[1] “ESG Data Integration by Asset Managers : Targeting Alpha, Fiduciary Duty & Portfolio Risk Analysis,” Opimas, 17 June 2020.

[2] “Global Asset Management 2020: Protect, Adapt, and Innovate,” Boston Consulting Group, 19 May 2020.

[3] “Sustainable investing: fast-forwarding its evolution,” KPMG-AIMA-CAIA, February 2020.

[4] “HFR® Global Hedge Fund Industry Report – Year End 2019,” Hedge Fund Research.

[5] “European asset allocation insights 2020,” Mercer, August 2020.

[6] “Advancing environmental, social, and governance investing,” Sean Collins and Kristen Sullivan, Deloitte Insights, 20 February 2020.

[7] “Sustainable Signals – The Individual Investor Perspective,” Morgan Stanley Institute for Sustainable Investing, 2019.

[8] “Analyzing Active Managers’ Commitment to ESG: Evidence from United Nations Principles for Responsible Investment,” Soohun Kim and Aaron Yoon, March 17, 2020.

[9] “Investing with SDG outcomes: a five-part framework,” UN PRI, 15 June 2020.

[10] “ESG Rating Disagreement and Stock Returns,” Rajna Gibson, Philipp Krueger and Peter Steffen Schmidt, Swiss Finance Institute, 22 December 2019.

[11] EPFR Data, epfrglobal.com, 1 August 2020.

[12] “Third of EU’s 750 billion euro recovery fund may come via green bonds: S&P,” Reuters, 15 July 2020.

<[13] “Equinor’s Empire Wind” equinor.com/en/what-we-do/empirewind.html.

[14] “Mayflower Wind,” mayflowerwind.com.

The post The Case for the ESG Hedge Fund appeared first on HFR Investments.

Traditionally, co-investments are thought of exclusively in context of private equity and debt funds, but that
limited thinking will cause hedge fund managers and investors to miss out on a number of opportunities.

In terms of private funds, equity or debt, a co-investment is a minority investment made alongside the manager for a
more concentrated single exposure to enhance returns, – at least, that’s the idea. This model also keeps fees down,
as the investment is usually a one-time event and continued strategy implementation isn’t required.

For hedge fund managers the idea is the same, but instead of investing directly as part of a private investment,
hedge funds can also use public securities to make their investments.

A recent survey on Co-Investments was issued by Hedge Fund Research, Inc. to hedge fund managers inquiring
about their co-investment offerings. To the first question, “Do you offer co-investments?” 24% of
managers responded “yes” – a figure much higher than we anticipated.

There is already significant co-investment activity taking place, with strong potential for growth. This is probably
due to multiple of reasons, with the predominate being:

1) Knowledge – Managers and investors are now more aware of co-investments and consider them a
viable option.

2) Structuring – These deals have become easier and easier to put together due to platforms and
outsourced structuring services.

When looking back at the last 20 to 30 years, I don’t believe that the deal flow and opportunities have grown, but,
rather, managers and investors have become more sophisticated. They understand co-investments are an option and are
taking advantage.

I think the continued conversation about co-investments offered by hedge fund managers will propel the idea to become
a more common and readily available investment approach in the coming years.

It’s Time to Start Somewhere

As a manager, it’s apparent your colleagues are starting to adopt these strategies and adding additional value for
their investors – so why wouldn’t you?

All things equal, allocators will tend to go with the manager that can offer more value. Offering co-investments just
might be that value that puts you over the edge.

It doesn’t take a large $250M dollar deal for a co-investment to make sense, you can start small. Of the survey
respondents that offer co-investments, 60% said that a typical deal size is less $25M, and 85% say it is less than
$50M.

To me, if you find an investment opportunity you love and plan to add it to your fund, why not think about making an
additional investment outside the fund and present it to your investors. You’ve already done the work, you’re
confident it will perform, and you have investors that trust you – seems like a win, win, win.

This additional value offered to investors creates a new revenue streams to your business: the revenue generated from
management fees, although nominal, and performance fees. For a high conviction investment, it’s almost all
upside.

And as the survey shows, even small deals are worth it. So, if you’ve been thinking about it but have been putting it
off, now’s the time to add additional value for your LPs.

Open Yourself to Opportunities

For Investors, the opportunities are out there, and the first place to go is directly to your current hedge fund
managers. Have a discussion with them and inform them that you would be interested in co-investments if the
opportunity ever came along.

Having these discussions early will allow managers to think about how to take advantage of opportunities as they go
through their investment process. They’ll look at deals with you in mind.

No matter the asset class you’re looking for, hedge fund managers have you covered. As expected, public equity
co-investments are the most common but beyond that there is a relatively even distribution across the remaining
types, including private offerings:

Co-investments from hedge fund managers may be even more opportunistic and flexible than in the private markets.

Ready to Pounce

This is all well and good, but there is still a key issue with co-investments that both managers and investors need
to overcome: These investments usually based on a single, short-lived idea that might not be available in a few
short weeks or months.

For a co-investment to happen, a manager must find the idea, the investors, and then complete the deal all before the
opportunity vanishes. It’s easier said than done. If you’re waiting until the investment ideas appear, you’re
already too late.

How does anyone combat a time crunch? Planning? Communication? Probably a little bit of both. First, planning on the
side of the manager will allow them to act when the opportunity present itself. And second, there needs to be
continued communication between LP and GP. I don’t mean the investor and the IR team, I mean regular conversations
between the investment team and decision makers at the allocators.

When considering such a time-sensitive tactical strategy, direct lines of communication between the partners are
critical to successful co-investing.

Contact the Author | Gregory Neal, Director of Investments | investments@hfr.com

Learn more HFR投資について at: hfr-investments.com
or reach out to investments@hfr.com

A downloadable, PDF copy of the article can be foundHERE.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds.

©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

The post Hedge Funds & Co-Investments appeared first on HFR Investments.

Should diversity be included when considering ESG? In short, absolutely. We know that diversity can stand on its own
merits and its importance transcends inclusion in ESG. As the leader of an MBE firm, I value the importance of
diversity and how critical it is to the world. However, I want to be clear: We are not here to discuss how diverse
workforces outperform or how investors should support diversity with dollars. Those are important issues, but there
are plenty of articles and academic papers evidencing these points. Today I want to focus on my individual
perspective and how an investment business can be viewed through a lens of diversity.

I spent the last twenty-five years in the investment industry learning from the banking and investment executives
I’ve worked with. For the most part, I encountered a typical homogeneous culture that was labeled as
“firm culture” or “tradition”. This monoculture was developed largely by industry
executives, who came from similar backgrounds, thought the same way, and were satisfied with the status quo. As a
young Mexican-American and Native American man, raised by a single mother on the South Side of Chicago, you can
imagine that neither my background nor my perspective fit the status quo when I joined the industry ranks in the
1990s. But those differences, and the challenges I overcame along the way, made me all the better for it.

Being a minority places you in an underdog category, and being an underdog forces creative thinking, assertiveness,
and bold leadership. It trains you to be humble, strong minded, and to have a global view—you cannot restrict
yourself from any possible opportunities. The world gets larger not smaller. You
must be self-reliant and must uncover and comprehend all risks. You challenge yourself to step outside of your
comfort zone and tolerate risk in a controlled manner. In an environment where nothing is given to you, you are put
in a position where you are constantly having to prove your value.

Being diverse as a firm means you are representative of the real world—you transcend the monoculture, push back
against groupthink, and value and amplify divergent perspectives. As any great investor knows, there are times when
you need to be able to step back, realize when someone with a different perspective has an edge, and listen to them—incorporating
unique information makes you successful.

When I launched HFR Investments, I contemplated the culture I wanted to foster: I asked myself, “Should I apply the
‘traditional’ approach to culture or should I go my own way?” I weighed the options and risks of incorporating my
diverse viewpoint and experiences into the firm. In the end, I have worked to apply a hybrid approach, blending my
own experiences and diverse background with some of the valuable teachings of my mentors.

From the beginning, I knew with certainty that a continuation of the traditional approach would most likely achieve
the same outcomes. While traditional investment firm culture can be successful, I knew a more diverse approach was
critical in building a firm that leads in innovation and does not fall into the status quo. I recognize my
background is different than most, and therefore, my perspective is framed from a distinct viewpoint. I believe
it is important to recognize this difference, but—even more importantly—leverage the strengths that I have
gained from it. My passion for applying my perspective to investing has led our firm to create
investment products rooted in diversity—products that are reflective of the expansive world we live in, and
reflective of the diverse perspectives of our industry.

I see the challenges of minority representation everyday as an individual, but especially as a small MBE firm. Some
might argue that being a minority-owned firm is a massive advantage over traditional investment advisory firms. I
would argue it is the opposite. Unsurprisingly, it is almost impossible to get the same visibility as a
multibillion-dollar investment firm. Even though a handful of MBE firms have become highly successful (with billions
in AUM), in reality they do not do enough to help smaller MBE firms. In fact, I would argue that they are focused on
getting the entire (albeit small) slice that is allocated to minority businesses. I believe it is the
moral duty of larger MBE firms to do more for smaller MBE firms, by offering mentorship opportunities and
working with us to enlarge the slice of the pie. As the Wall Street Journal reported earlier this month, despite commitments
to diversifying our industry from traditional firms, large and small alike—the racial makeup of the financial
services industry has not materially changed since 2009. If we want to create a more representative
industry, MBE firms need to work together to create real change.

Without fundamental changes to the industry, the traditional investment process and biases will remain the same. And
though that may be okay with some allocators, as an MBE firm, we want to break from the
traditional mold, incorporate diverse perspectives, and provide modern, richer ESG投資 opportunities to
the alternative investment industry. I would object to claims that ESG is simply a feel-good investment
policy. We believe that ESG metrics go hand in hand with outperformance, while making the world a better place.

A downloadable, PDF copy of the article can be foundHERE.

Contact the Author: Michael Arenibar, President | marenibar@hfr.com

Learn more HFR投資について at: https://hfr-investments.com
or reach out to investments@hfr.com

The post Perspective Through A Diversity Lens appeared first on HFR Investments.

In Tactical
Hedge Fund Allocation (part 1), we discussed using a tactical allocation strategy to increase
diversification during uncertain times such as the recent nationwide shutdown. We now want to address the flipside
of tactical allocation – opportunistic hedge fund allocation and strategies.

As the U.S. and the rest of the world is beginning to reopen, the future is fraught with ambiguity. No one can tell
you what’s coming next – The World Uncertainty Index, created by two senior officials at the International
Monetary Fund, is at its highest level in history, with a 52% (as of 3/31/20) increase from this time last year.

With this increased level of uncertainty there must be opportunity, and at the risk of sounding overly simple, the
first step in investing in these opportunities is finding an attractive set of investments.

Finding Unique Opportunities

New investment ideas can come from numerous sources, but we find that managers on the ground, closest to the action,
usually have the best insights. In order to find what you are looking for, it will require many conversations with
your current managers, prospect managers, and even completely new managers.

As we speak to managers each day it becomes more and more clear that there are many mispricings across equity and
fixed income markets. Now it’s just a matter of choosing the opportunity and manager that is right for you.

What We Are Seeing

We’re seeing dislocation across several markets, but I want to specifically highlight the “Fallen
Angels” or corporate bonds that were downgraded from investment grade to high yield during Q1 through to
today.

Many of the attractive high yield opportunities prior to the global pandemic were companies
in challenged industries such as retail and energy, and prospects were limited to good companies with sub-optimal
asset or bad balance sheets. However, during the month of March the situation entirely changed, permeating virtually
all corporate industries.

We also saw the percentage of the High Yield Index constituents trading at distressed prices (>1,000 bps credit
spread) increased from 8.1% to 32.0% during the first quarter.

Numerous Fallen Angels are among that 32% – Going from investment grade to junk and a spread of greater than 1,000
bps in such a short time seems unlikely. In such a short time period this feels more like emotional trading and
mispricings in the market. I’m sure some bonds are priced correctly, but I think if you can find a manager that
knows the space well, they will be able to take advantage of these large mispricings.

You’ve now spent the time having the conversations and researching the ideas; you’re reasonably sure you’ve found an
appealing opportunity set. What do you do next?

Make the Investment

You need to find a way to invest. If the idea came from a manager that you’re already working with and know well.
This makes the allocation process as easy as it can be.

But what if the investment is with a new manager you’ve done limited research on, or an unknown manager altogether?
How do we ensure access to the opportunity before it disappears? How do we make the allocation in a way that
increases control and mitigates risk?

I see three main ways to access opportunistic investments:

Direct Allocation

Most institutional investors understand what is required when making a direct allocation to an existing fund. This
may be the best option for some, but I think in most cases it includes additional complexity and investment
strategies and exposures that will not fit within your portfolio.

Separately Managed Accounts

The second option is to use separately managed accounts or SMAs. Using an SMA structure allows you to access the
opportunities as well as increase control over other exposures existing in the manager’s portfolio.

Co-Investments

The last option is partnering with the manager and investing in a co-investment structure. This formation gives you
direct access to the investments you want, without the exposure to the rest of the manager’s portfolio.

We’re living in uncertain times, with historically low interest rates and reduced return expectations over the next
ten years. To me, seizing opportunity is more important than ever. Who knows when the next one will come along?
Tactically allocating to opportunistic hedge fund investment ideas will allow you to realize those opportunities
quickly and efficiently.

A downloadable, PDF copy of the article can be foundHERE.

Share this article on social media!

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds.

©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

The post Tactical Hedge Fund Allocation: Part 2 appeared first on HFR Investments.

As the COVID-19 pandemic reached the United States in late February, markets worldwide experienced one of the
sharpest short-term selloffs in recent memory—the S&P 500 declined by nearly 34% from February 19 to March 23,
and two days in March are now among the six worst in S&P 500 history.[1]

A price war between oil producing countries compounded market declines. The United States entered an extended
lockdown, driving down demand for fuel. The resulting glut of American crude after two months and counting of
nationwide lockdowns, caused WTI futures to close negative for the first time in history on April 20, 2020. Over the
past decades, markets have weathered downturns, recessions, bear markets, selloffs, bubbles, corrections, and a
litany of other crises, economic or otherwise—and yet, the effects of the COVID-19 crisis feel uniquely
historic.

Given the unpredictability of the crisis as a market event, investors were left to scramble for risk-off assets, safe
bets during an extended quarantine (upstart communication technologies like Zoom come to mind), and any other way of
shoring up portfolios. Amid all of this, one strategy outperformed,perhaps to the surprise
of many seasoned investors: sustainable and socially responsible investment strategies, otherwise known
as ESG.

To be sure, ESG outperformance over the short term should be taken with a grain of salt. At the end of the day, the
consensus of investors is that ESG is a long-term outlook strategy. Investment risks
linked to global climate change may be accelerating, but they are still longer term in nature. Firms with poor
social and governance ratings may continue to be successful, even over the coming years. However, ESG-minded
investors predict that, over time, investments in firms with unsustainable environmental practices, a lack of
diversity, and poor worker engagement and governance will be exposed to greater risks and losses over time.

Short-Term Potential in a Unique Crisis

Despite ESG’s long-term thesis, the COVID-19 crisis has demonstrated that perhaps these strategies have greater
short-term potential—or at least, potential during such a unique market event, as they hedge against
many of its unique risks. Fossil fuel avoidance hedges against decimated demand for auto and jet
fuel. Increased scrutiny on worker benefits and protections bodes well for firms with strong ratings in these areas.
ESG investors and funds are less likely to be caught up in panicked selloffs, as they take a longer view.

Multiple studies of the market rout, spanning roughly late February through March, demonstrate that ESG
investments tended to outperform their peers during this period: ESG ETFs, mutual funds, and
well-rated companies tended to decline less than the broader market, while firms who rated poorly on ESG metrics
tended to underperform their benchmarks.

S&P Global analyzed 17 ETFs and mutual funds, which select stocks based in part on ESG
criteria, and found that 12 lost less value than the broader market, as represented by the
S&P 500.[2] The top performer had a 5.4% decline through the year as of close April 9, versus a 13.7% decline in
the S&P 500. Similarly, the Wall Street Journal found that 60% of the largest ESG ETFs and mutual
funds lost less than the S&P 500 during the first quarter.[3] Perhaps the outperformance of
ESG funds is due to obvious factors in weighting: They tend to be weighted more heavily towards technology
stocks—some of the better performers in March—and generally avoid all or part of the fossil fuel supply chain, some
of the worst performers during the lockdown.

Favorably weighted ESG ETFs and mutual funds were not the only outperformers during the February to March selloff,
however. A study carried out by Fidelity International demonstrated that equities and fixed income securities of
firms rated highly on ESG factors outperformed their peers, while poorly rated firms’ stocks and debts
underperformed.[4] The study found that each level of Fidelity’s proprietary ESG rating scale (A down to E)
translated to an additional 2.8 percentage points of stock performance versus the S&P 500 on average, among the
2,689 companies rated.

ESG as a Metric of Long-Term Viability

As long-term investors, some ESG investors have viewed the present crisis as a litmus test for firms’ capabilities to
handle the next global crisis. The Journal has reported that since March, an investor coalition with a
combined AUM over $9 trillion, representing more than 300 investors including big names such as Invesco and BMO, has
formed to pressure companies to provide paid sick leave and protections for worker health.[5] ESG investors believe
that well-rated companies that handle the current crisis with the appropriate care will perform better in the short
term, but, more importantly, these firms’ handling of the current situation will translate into longer
term sustainability and viability, especially when facing similar future crises.

The COVID-19 crisis shows that while ESG投資 is a long-term thesis, its emergence as a competitive strategy was
closer than we may have previously thought. The unique pressures of a pandemic and lockdown put a brighter spotlight
on how well or poorly companies engage with their workforce, potentially accelerating the struggles and demises of
poorly ESG-rated firms. Demand for fuels are down, creating short-term pressures on the nonrenewable energy sector,
but these short-term pressures have come during a paradigm shift in the fuel sources of our nation’s electric grid.
The COVID-19 crisis may be a snapshot of where we are headed as investors—a world where ESG strategies
are not just wishful thinking, but integral to sound investing policy.

Credit Ratings Increasingly Tied to ESG Ratings

ESG considerations have already begun to affect how issuers access capital markets. In April, Moody’s reported that
material ESG risks were cited in one-third of its 7,637 private-sector rating actions in
2019.[6] Of these rating actions, 88% cited governance concerns, 20% cited social concerns, and 16% cited
environmental issues, and in many instances, the ESG concerns were the key drivers in the rating change. The report
states that ESG considerations are of “growing importance” in Moody’s assessment of issuer credit quality, as “the
materiality of key environmental and social issues continues to increase.”

Accelerating Transition to Renewables

Long-term ESG risks linked to global climate change are already becoming material—due to massive structural changes
in the U.S.’s energy consumption habits—not the COVID crisis. The U.S. Energy Information Administration’s May 2020
Short-Term Energy Outlook shows that for the first time in U.S. history, the EIA expects both nuclear
and renewable energy sources to overtake coal burning plants in terms of billions of kilowatthours
of electricity generated.[7] In 2020, the EIA expects coal generation to fall by 25% and renewable energy sources to
grow by 11%, and the EIA expects renewables to continue to outproduce coal in 2021.

Despite the Trump administration’s efforts to boost America’s coal producers by loosening clean air regulations, coal
burning plants have continued to shutter, with major utilities planning to retire dozens of plans in the
next five years, according to S&P Global.
[8] No new
coal plants are currently slated to be built, according to The New York Times¸ and in the first
four and a half months of the year, renewables “produced more electricity than coal on 90 separate
days—shattering last year’s record of 38 days for the entire year.”[9]

Even if the pandemic’s short-term effects—specifically, decreased energy demand—may play a small part in these
changes, ultimately we are adopting renewable energy sources at an astonishing pace and moving away from coal simply
because renewables have gotten so much cheaper: The cost of building wind projects
declined by 40% over the past decade, according to the Department of Energy’s Lawrence Berkeley National Laboratory,
and the cost of solar projects declined by 80% from 2010 to 2018, according to the National Renewable Energy
Laboratory. Increasingly cost-efficient renewables, coupled with a fracking boom that has pushed natural gas prices
to some of their lowest prices in history, will all but guarantee that we leave costlier and dirtier coal behind in
the dust.[10]

ESG: Where Investors Are Headed

The importance of ESG considerations will only grow in magnitude over the coming years due to all of these changes:
ESG criteria will increasingly impact credit ratings and creditworthiness; the long-term viability of firms will
depend on robust governance, transparency, and worker engagement; and the ways we produce and consume energy—not
just as a nation, but as a whole planet—will change as we transition away from nonrenewables to cheaper renewable
sources.

In the near term, some investors may see the potential for ESG as a defensive play during the COVID-19 crisis.
Increasingly, investors are seeking out ESG funds and strategies to build their long-term portfolios. However, the
present crisis demonstrates that in the end, all firms and investors will eventually need to start paying attention
ESG factors, or otherwise risk their performance lagging behind their peers. For all these reasons, HFRInvestments
believes that an ESG framework is modern finance, and we continue to use ESG metrics to target alpha.

NEXT TIME: Alternative ESG Strategies

Stay tuned for the next edition, which will cover the emergence of alternative ESG投資 strategies.

For more information on HFR Investments

Please visit www.hfr-investments.com

Or email us at investments@hfr.com

Andrew Koski, Analyst – HFRインベストメンツ – andrew.koski@hfr.com

A downloadable copy can be found here.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to
be redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation. A Confidential Offering
Memorandum will set forth the terms of an investment in a fund, including risk factors, conflicts of interest, fees
and expenses, and tax-related information. Such material must be reviewed prior to any determination to invest in
any of HFR’s funds.

©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

[1] “Sizzlers and Fizzlers,” S&P Dow Jones Indices.

[2] “Major ESG investment funds outperforming S&P 500 during COVID-19,” S&P Global Market
Intelligence, 13 April 2020.

[3] “Sustainable Funds Fell Less During the Selloff,” The Wall Street Journal, Maitane Sardon, May
3, 2020

[4] “Survival and sustainability,” Fidelity International, Anne Richards, Chief Executive Officer, 16 April
2020.

[5] “Coronavirus Fuels Investor Push for Worker Benefits,” The Wall Street Journal, Dieter Holger, 6 May
2020.

[6] “ESG risks cited as material in one-third of Moody’s private-sector rating actions,” Moody’s, 14 April
2020.

[7] “Short-Term Energy Outlook (STEO),” U.S. Energy Information Administration, 4 May 2020.

[8] “So far, COVID-19 fallout not altering plans to retire US coal-fired plants,” S&P Global Market
Intelligence, 6 May 2020.

[9] “In a First, Renewable Energy Is Poised to Eclipse Coal in U.S.,” The New York Times, Brad Plumer May
13, 2020.

[10] “Henry Hub Natural Gas Spot Price,” U.S. Energy Information Administration.

The post ESG投資 During COVID appeared first on HFR Investments.

(1 of 2)

In uncertain times, like we’re experiencing today, humans look for one of two things: security or opportunity. Since
most allocators are human, seeking out security or opportunity can be a crucial decision when making
investments.

If hedge funds are an important part of your portfolio, then tactically shifting your asset allocation toward hedge
funds can provide enhanced security through diversification. Or it can create unique opportunities, by allocating to
managers that are taking advantage of the current market environment.

When we talk about security, what we’re really talking about is the diversification provided
by hedge fund investments. However, since hedge funds are complex investments, quickly adding new managers is not in
the cards for most allocators.

So how do we access the diversification we’re looking for?

A great place to start might be with a broad-based investable hedge fund index that provides access to the
risk/return profile of the overall hedge fund universe. Investing in indices reduces the manager risks associated
with allocating to single hedge funds, along with the burdensome and costly due diligence process of underwriting
multiple managers.

Ultimately, what we’re looking for in this environment is access and speed. Increasing your exposure to hedge fund
strategies has never been easier.

Another way allocators handle uncertainty is to look for opportunities caused by that very
uncertainty. When looking through the lens of tactical allocation, this might look like a larger bet on one or two
specialty managers that can execute on a specific attractive opportunity set.

However, unless you already have a predetermined lineup of funds, this process could take from six months to a year
or more to properly underwrite and make your first allocation. Put another way, the
opportunity has most likely passed you by.

A tale of two outcomes: COVID-19

If you pay attention to the financial media, as most of us do, you see two main theories for where the economy is
going in the coming months.

The first, which I believe to be wishful thinking, is once the government gives the all clear, the economy will go
back to normal relatively quickly. The other, however, is a grim scenario, which predicts the world descending into
a depression that could take a decade or more to recover.

I would guess that the outcome lies somewhere in the middle, but the range of possible outcomes is still wide and
relatively unclear. This puts us right back to where we started – Are you searching for security through
diversification? For opportunity? Or maybe, for a bit of both.

Diversification

As I mentioned earlier a broad-based investable hedge fund index could be a solution when tactically allocating to
hedge funds. At HFR, we have numerous investable versions of our indices that serve several needs.

While I cannot say for sure how an index may perform in the future, I can show you the downside protection provided
by the HFRX Global Index during the global financial crisis and over the past several months of uncertainty caused
by COVID-19.

Up/Down Capture – Jan 2007 to Dec 2009

Up/Down Capture – Jun 2019 to Mar 2020

Imagine what it might look like to tactically supplement your hedge fund portfolio. What could that mean for your
returns? What could it mean for your peace of mind? Are you willing to possibly give up a little on the upside for
downside protection during uncertainty?

NEXT TIME: Opportunistic Manager Selection

Stay tuned for the next edition of Tactical Hedge Fund Allocation, which will cover
tactically allocating to managers to take advantage of attractive market dislocations.

By: Gregory Neal Director of Investments and Business Development, HFR
Investments, LLC, investments@hfr.com

A downloadable, PDF copy of the article can be found HERE.

Disclaimer: This article does not constitute an offer, or a solicitation of an offer,
to buy or sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be
made solely by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is
confidential and is intended solely for the information of the person to whom it was delivered. It is not to be
redistributed to any third parties without the prior written consent of HFRインベストメンツ (“HFR”).

The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund
universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage,
distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative
value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund
industry.The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure
global developed market equity performance. The 3 month US dollar LIBOR interest rate is the interest
rate at which a panel of selected banks borrow US dollar funds from one another with a maturity of three
months.The HFRI Fund of Funds Composite sets forth the performance of Hedge Fund Research, Inc.’s hedge
fund index, an equally weighted performance summary of over 800 constituent fund of funds.

Indices are not investable themselves, and thus do not include the deduction of fees and other expenses
associated with an investment in a fund. When reviewing the performance of any fund to a broad‐based index,
investors should consider the material differences between indices and funds. Index information is provided merely
as an indication of the performance of various capital markets. The performance and tax consequences of an
investment in the securities represented by an Index, on the one hand, and an investment in the fund, on the other
hand, are materially different.

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation.

A Confidential Offering Memorandum will set forth the terms of an investment in a fund, including risk factors,
conflicts of interest, fees and expenses, and tax‐related information. Such material must be reviewed prior to any
determination to invest in any of HFR’s funds.

©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are
the trademarks of Hedge Fund Research, Inc.

The post Tactical Hedge Fund Allocation appeared first on HFR Investments.

COVID destruction brings a shift to Hedge Funds

These times are certainly challenging for everyone. As we find ourselves impatiently waiting to go back to normalcy,
the woes of COVID-19 have resulted in fear gauge levels beyond what we have seen since the 2008 housing market
crash. As we see every day in the media, the spread of the virus has had a profound impact not only on our health
and economy, but our state of mind. Media reports have suggested that the virus has killed thousands of people so
far in the U.S. with the expectation that we have not reached our peak. And although we are not quite there yet, the
U.S. has shown great resilience through its history of crises.

In terms of the market, the turmoil of COVID-19 has: (1) affected all supply chains, (2) prompted the Fed to cut the
Fed Funds rate twice in March (now @ zero), and (3) pushed the Fed to initiate a $700 billion quantitative easing
program and Congress to pass a $2 trillion government stimulus package. Bleak unemployment forecasts are expected to
pummel the economy further. At the same time, a price war between oil producing countries has dropped oil prices to
$20 a barrel – a first in 20 years. A complete bloodbath.

We are seeing levels in the VIX higher than they’ve been since 2008 – a 300% YTD change (VIX currently @ 56), 10-year
yield falling to 0.68% flattening the curve, and retraction of the equity markets (S&P @ 2,584 close as of
3/31/2020) down 20% YTD. It is unclear if a COVID-19 vaccine (potentially Chloroquine and Hydroxychloroquine) will
be available this year, and if so, in massive quantities to be effective – very unlikely. We would hope for a
V-shape recovery, but we are under the belief that a L-shape recession would not be a surprise.

In this bear market selloff, portfolios that were overweighted equity have seen most performance vanish. We can
certainly anticipate a long recovery in the equity space, and even more so with dividend cuts through the end of the
year. However, we also see potential in alpha generating and capital protecting strategies going forward. So, we
believe this is an opportunistic time to reallocate capital back into hedge funds.

Hedge funds have been generally under allocated the past ten years, and we expect to see a comeback as hedge fund
managers have experience trading through a volatile market and over various market cycles. We have spoken with our
hedge fund managers who so far have been able to navigate the uncertain landscape and believe there are many
opportunities with motivated sellers, higher discounts, volatile spreads, great price dislocations, and other
high-conviction trades.

While institutions reevaluate their single manager holdings, a swift strategy shift can be made to an investable
hedge fund index such as the HFRX. The HFRX Indices are one of the longest-lived family of 投資可能指数 in the
market – funded since 2003. Institutions can use either of the three investable segments: (1) Liquid Alternative
UCITS Constituents, (2) Hedge Fund Constituents, or 3) SMA’s. Information on the HFRX benchmarks can be found at http://www.hfrx.com.

Index tracking vehicles are cost-efficient, can be used for liquidity needs, and a smart way to increase hedge fund exposures in your total portfolio with global, strategy, or sub-strategy index allocations.

With overall markets declining in double digits, the HFRX Global Index had declines in the single digits, and Macro
Systematic/CTA Index was in positive territory through March and YTD.

In these times, we think it’s important to reevaluate risk factors, liquidity, and performance to achieve your
institution’s investment goals. It’s also a perfect time to review your existing cash overlay strategy that can meet
your short-term cash needs but continue to provide relative outperformance.

The political apparatus has started to implement many tools for a softer landing of the economy, but the real
question persists if balance sheets have the wherewithal to shoulder a long deep slowdown if one is to occur. We, as
always, will continuously monitor and evaluate the state of the overall market, but we believe that the good times
have rolled off, and it is now time for everyone to roll up their sleeves.

Michael Arenibar, President
HFRインベストメンツ
marenibar@hfr.com

A downloadable copy may be retrieved here.

Share this article on social media!

Disclaimer: This article does not constitute an offer, or a solicitation of an offer, to buy or
sell any securities, and is intended for informational purposes only. Any offer of an HFR Fund will be made solely
by a Confidential Offering Memorandum, and then only to qualified purchasers. This document is confidential and is
intended solely for the information of the person to whom it was delivered. It is not to be redistributed to any
third parties without the prior written consent of HFRインベストメンツ (“HFR”).

The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund
universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage,
distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative
value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry.
The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global
developed market equity performance. The S&P 500 Index, as adjusted to reflect investment of dividends, is an
unmanaged index of 500 stocks and sets forth the performance of a well-known, broad-based stock market index. S&P
500® is a trademark of The McGraw-Hill Companies.

Indices are not investable themselves, and thus do not include the deduction of fees and other expenses
associated with an investment in a fund. When reviewing the performance of any fund to a broad-based index,
investors should consider the material differences between indices and funds. Index information is provided merely
as an indication of the performance of various capital markets. The performance and tax consequences of an
investment in the securities represented by an Index, on the one hand, and an investment in the fund, on the other
hand, are
materially different.

Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions
constitute judgment, may prove inaccurate, and are subject to change without notice. Our views, strategies, and
examples may not be suitable for all investors. References to specific strategies are for informational purposes
only, and is not investment advice, and should not be interpreted as a recommendation. A Confidential Offering
Memorandum will set forth the terms of an investment in a fund, including risk factors, conflicts of interest, fees
and expenses, and tax-related information. Such material must be reviewed prior to any
determination to invest in
any of HFR’s funds.

©2020 HFRインベストメンツ, all rights reserved. HFR®, HFRI®, HFRX®, HFRq®, HFRU, and HEDGE FUND RESEARCH are the
trademarks of Hedge Fund Research, Inc.

The post COVID Destruction Brings a Shift to Hedge Funds appeared first on HFR Investments.

HFR traditionally known for its hedge fund databases, indexes and historically as a fund of hedge fund firm that has
been embraced as endowments, foundations and pension funds initially dived headfirst into the absolute return space
more than a two decades ago.

“It is a great opportunity and we are very excited about what we are doing,” said Gregory Neal, director of
investments and business development at HFR Investments, and a nearly nine-year veteran of the overall firm.

Moving away from a commingled fund of hedge fund model, HFR officials led by founder Joseph Nicholas had already
shifted into the popular UCITS arena through a partnership with Aberdeen Standard Investments (ASI) back in
September.

This endeavor centers on the data side of the business as Aberdeen has incorporated a monthly priced strategy
designed to track the popular HFRI 500 index, which is comprised of 500 hedge funds across a broad range of
strategies. The investment strategy allows investors access to HFR’s investable index family with 30 underlying
investable hedge fund strategies and sub-strategies giving investors the opportunity to choose those most suited to
their needs.

Last September’s launch was preceded by the successful launch of the ASI HFRI-I Liquid Alternatives strategy, which
tracks the performance of an index of roughly 180 UCITS hedge funds, which following launch in February 2019 grew
quickly to $650 million in assets under management.

The newly branded HFR Investments carries a smaller AUM of around $250 million and is hitting on some core areas of
interests for investors – Minority and Women-owned Business Enterprise (MWBE) designation, ESG-oriented offerings,
bespoke offerings, manager of manager offerings and managed accounts.

Manager of manager offerings will likely be similar to other specialists that worked in the institutional investor
space and will allocate to long-only emerging and minority managers with a diverse strategy set.
The official
MWBE designation is expected to go through soon and is due to the work of Michael Arenibar, president of HFR
Investments and an executive with more than 14 years’ experience at HFR, including as chief compliance officer at
the Chicagobased firm.

According to Neal, Arenibar was initially looking to launch an ESG-focused company, but the focus has broadened
alongside the opportunity set for serving investors interested in hedge funds and long-only strategies with a niche
focus such as ESG, emerging manager strategies and minority-owned focused offerings.

Since 2005, HFR has created roughly 250 managed accounts for clients, the majority of which took place over a 10-year
period.After 2015, the cost of opening up these accounts rose, but for firms that can offer investors scale it eases
the process of allocating to separately managed accounts.

Neal is heading up the managed account side and views this as a perfect time for both HFR and new clients to
diversify their portfolios both from the manager perspective (hiring emerging managers and MWBE firms) and from the
strategy perspective in adding ESG-oriented strategies.

A digital copy of the article can be found here.

Susan Barreto, Editor

Susan is an award-winning journalist who has worked for a number of global financial publications including Pensions
& Investments, HFM Week, Absolute Return, InvestHedge and Lipper HedgeWorld. Much of her career has been
covering the global finance industry with an institutional investment focus covering pensions, endowments,
foundations and family offices for more than two decades. She has covered hedge fund strategies most recently as
Editor-at-Large for HFM Global.

Alternatives Watchis a daily news platform that covers the rapidly evolving world of alternative
investments geared toward institutional investors. We cover investor mandate activity as well as manager news across
private markets including hedge fund, private equity, private credit, infrastructure and real estate. With thousands
of investment strategies to choose from with billions of dollars up for grabs, our aim is to give the most accurate
and timely snapshot of the most innovative and entrepreneurial segment of asset management.

The post (HFR in the Media) “HFR hits the reset button for a new era in hedge fund investing” by Susan Barreto, Alternatives Watch appeared first on HFR Investments.