Asset owners think hedge funds could do more on ESG

A joint Cerulli-PRI study shows asset owners want more responsible investing from hedge funds, including better integration of ESG criteria and better communications.
Asset owners think hedge funds could do more on ESG

The concept of responsible investing has percolated beyond traditional asset classes through to hedge funds. But not sufficiently in the eyes of some asset managers.

For some who regularly engage with them it may have even raced to the top of the industry's agenda.

“Responsible investment is among the most prominent themes in asset management today, both across the board and in the hedge fund sector specifically," industry consultancy Cerulli Associates said in a statement on Wednesday (July 17). 

That follows the white paper it jointly published with the UN-supported Principles for Responsible Investment, which detailed the results of two earlier global surveys. One drew responses from 27 asset owners on how they are approaching the issue and what they want to see from the industry, while the other gathered responses from 42 hedge fund managers. 

Cerulli could not be immediately reached for further details on the scale and nature of the respondents.

More than a fifth and almost half of the asset owners who replied to the survey indicated that they believe it is “very important” for hedge funds to integrate responsible investment practices now and in two years’ time, respectively. 

These proportions climb to 78% and 92%, respectively, once respondents who thought it 'somewhat important' are included too.

The results mirror growing efforts by Asian asset owners to better prepare their investment portfolios, including any alternative assets, for the growing threat of climate change and the challenges that might arise from questionable governance and social disharmony.

“In time, the value of a business will be its impact on societal issues; asset owners recognise this, and hedge fund managers have a role to play in helping them make good choices,” Justina Deveikyte, Cerulli's associate director of European institutional research, said in the statement.

Almost three quarters of Japanese institutional investors, for example, either have ESG policies in place or are planning to include ESG criteria in their investment mandates within the next five years, according to a June report by alternatives data specialist Preqin.

An executive at a Greater China-based insurer, similarly, told AsianInvestor on condition of anonymity that her firm had established in-house ESG policies covering all asset class. This included reviewing the responsible investing policies of any potential counterparties and barring certain types of of investments. 

“In the future, everyone will have to bear the ESG principles in mind,” the executive said.


While the demand for ESG integration from investors is there, more efforts from hedge fund managers are needed.

“Asset owners also want hedge funds to integrate ESG factors into their investment decision-making in a sophisticated way,” the survey said.

Simply excluding the so-called sin sectors such as alcohol and tobacco is not enough; what is needed is a fuller integration, with managers assessing all investments with ESG principles, it signalled.

Strategy-wise, the survey found that most respondents (46%) currently incorporate responsible investing criteria in equity long/short funds. The reason being that with this particular strategy it is relatively easier for managers to identify strong performers for long positions and weak ones to short.

But the comparison of responses from asset owners and managers also provides a stark contrast of how they practice ESG investing in the hedge fund asset class. Overall, asset owners take a much more holistic view to embrace responsible investing, with 81% of asset owners using ESG integration for their hedge funds investments.  

“Hedge funds should keep in mind that asset owners increasingly expect those managers that do not integrate [responsible investing] considerations into their investment process to have a good explanation for not doing so,” the report said.

Cerulli hedge fund
Source: Cerulli


Better communications generally between hedge fund managers and asset owners are seen as important in helping to drive the trend.

As the Cerulli-UN PRI report notes, asset owners believe that “hedge fund managers’ annual reporting is currently insufficient”.

Four in 10 of the asset owners who responded said they would like their hedge fund managers to report their ESG activities and risks assessments on a quarterly basis, while 8% said they wanted it done monthly.

Unfortunately, more than half of the hedge fund managers covered by the survey have so far only been able to do that on an ad-hoc basis.

The communication format also matters.

Almost three quarters of the asset owner respondents indicated that they want written reports but less than half of the managers surveyed said they currently provided that, with around a third communicating with their asset owners only via side letters or emails.

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