ESG CHAPTER “WE BELIEVE THAT, IN TIME, ESG WILL NOT BE LOOKED AT AS A SEPARATE INVESTMENT FACTOR, BUT INSTEAD WILL BE A ROUTINE PART OF THE RANGE OF TOOLS AND PROCESSES THE INDUSTRY APPLIES IN ANALYSING COMPANIES AND MANAGERS.”
LILLY KNIGHT
CO-HEAD OF INVESTMENT MANAGEMENT, K2 ADVISORS
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istorically, ESG investors excluded hedge funds from their asset allocations, as there were few ESG solutions available in the hedge fund universe. We acknowledge that the best practices of ESG integration are still evolving across hedge fund strategies, and indeed all strategies. As a result, we partner with our hedge fund managers as they develop their approaches, rather than prescribe any one singular approach. Our ESG philosophy and long history of responsible investing is grounded in understanding how our approved managers incorporate ESG and DEI considerations within their investment process and across their management company. Our engagement with hedge fund managers focuses on stewardship and education, with a goal of evolving manager ESG processes, to increase sustainability awareness and appropriate implementation, and to advance the entire hedge fund community along the ESG spectrum. Our investment and operational due diligence teams act as stewards of the assets entrusted to us, and we use our influence to engage constructively with our underlying managers in an open dialogue about ESG philosophies, methodologies, and best practices.
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As part of our work in stewardship, one of the aspects K2 measures over time with respect to individual hedge fund managers is ESG momentum and improvement. We believe that our role as a steward is to educate managers and help them generate and demonstrate positive momentum, or continuous improvement, in their ESG practices. We recognise that ESG approaches and solutions will vary by client, manager, and strategy. Our purpose is to assess the intentionality, applicability, and quality of the given ESG approach to add value to our investments. We believe that, in time, ESG will not be looked at as a separate investment factor, but instead will be a routine part of the range of tools and processes the industry applies in analysing companies and managers. We construct tailored portfolios of hedge funds that seek to meet investors’ investment risk and return objectives, but also their differing ESG objectives. Utilising position level or holdings-based transparency where applicable, our ‘ESG 360° Dashboard’ marries traditional ESG scoring metrics with attribution analysis, providing us with a holistic
view of their hedge fund investment through an ESG lens. ESG advancements within the hedge fund industry are being recognised at a time when the outlook for hedge funds is constructive. With elevated equity valuations and bond portfolios not providing the protection that they have historically, hedge funds may be an attractive alternative for investors to consider. When considering the evolving investor appetite for hedge funds over the next year, we see two types of investors. First, the long-term ESG committed investors who historically may not have considered hedge funds as part of their ESG portfolios. This was because, as an asset class, hedge funds lacked transparency and the complexity of the instruments challenged ESG analytics, which historically were designed around long only investing. Second, a younger wave of investors who themselves are new to the ESG investing landscape and are demanding more responsible solutions. Both groups are quickly recognising that ESG investing can now be tailored around hedge fund portfolios.
HEDGE WEEK GLOBAL OUTLOOK REPORT I JANUARY 2022
