Hedge fund director says clients balk at ESG risks

Too little data on impact of switching to investments with ESG goals, says IPM managing director.

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

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

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

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

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

Houles says clients are “hesitant to sacrifice the promised alpha from absolute return strategies.” So they “stay on the sideline.”

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

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

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

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

Erik Eidolf, the chief executive of Stockholm-based hedge fund Nordkinn Asset Management, says he’s “seen an accelerating trend of our institutional investors requesting more granular information about how we implement sustainability.”

[More: 3 keys to integrating ESG into client portfolios]

But Eidolf also warns that ESG is going mainstream, and says asset managers can’t afford to ignore it.