ABN Amro introduces structured fund of hedge funds

ABN Amro and Kenmar team up to create a range of hedge fund products focused on the sustainable investment sector.
ABN Amro is set to create a series of structured fund products built around a fund of hedge funds that invests in the sustainable investment sector.

The portfolio is run by Kenmar, a US fund of funds manager that handles $3 billion of client money, and is the first long/short fund of hedge funds focused on managers that meet the criteria of sustainable investing û in other words, investments that place a strong emphasis on social and environmental issues, with the ultimate goal of creating a more sustainable economy.

"We would like to get a discussion about sustainable investment going," says Pieter Oyens, head of Asia fund-linked derivatives marketing and structuring at ABN Amro in Hong Kong. "Getting investors to direct funds to sustainability is a real way we can make a difference in the world."

Up to 30% of the Global Eco Fund's underlying managers are long-only or long-biased managers, with the rest of the money invested in long/short equity specialists and commodity managers. The fund officially launched on Monday after securing a $26 million outlay from its first investor. Braxton Glasgow, a principal of Kenmar based in the firm's headquarters in Rye Brook, New York, hopes to be able to grow this to $100 million by year-end and $350-400 million by the end of 2008.

"But it could grow at a much more rapid rate than that," he says. "Over the next few years we expect a lot more money to come into this space. It's a very attainable goal."

According to the European Social Investment Forum the market for socially responsible investments (SRI) in Western Europe is now estimated at Ç1 trillion, or as much as 10-15% of total European funds under management. It is a similar story in the US, where the Social Investment Forum reported in its fifth biennial SRI report in 2006 that the market was worth $2.29 trillion, or close to 10%.

This growth is driven in part by institutions and pension funds that want their assets to be invested according to certain ethical and environmental guidelines, but even investors with yeti-sized carbon footprints appreciate the returns they have enjoyed from investing in the asset class.

During the past five years, the Dow Jones Sustainability Index has grown by about 10.2% a year, compared to 4.2% on the iBoxx Corporate Bond Index and 6.6% on the S&P 500. "People don't invest for fun," says Oyens. "They want to get paid. So if you can merge excellent returns with sustainability, then you have a very powerful tool going forward."

Indeed, the sector's success has promoted the creation of a string of new products and innovations that have opened SRI to a growing pool of investors, though this is the first time they have had the opportunity to invest in a fund of hedge funds.

ABN Amro approached Kenmar with the idea of creating the Global Eco Fund after working with the manager to overlay some structures on one of its exiting commodities fund of funds. At the time, the only products in the market focused on long-only funds, so ABN Amro asked Kenmar to explore the possibility of creating a long/short product.

The result is a fund of funds that comprises 35 managers û 17 in the US, 13 in Europe and five in Asia û that is being actively promoted in a variety of structured forms, with ABN Amro's structured products team creating, for example, leveraged products for investors looking for yield, principal protection for private bank clients or structures that address issues such as capital treatment under Basel II.

Half the portfolio is allocated in socially responsible equities and sustainable environment assets, with the remainder split between financials, opportunistic asset allocation, commodities, water, biotech, energy, emerging markets and weather. The fund is targeting 10-12% returns and 4-5% volatility, though ABN Amro will offer structures that can tailor the risk/return profile to cater to investors' specific needs.
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