The hedge fund industry is lagging peers when it comes to integrating ESG investment factors, according to research by consulting firm bfinance.
Out of 256 investors surveyed, only 7% reported that their hedge fund and liquid alternatives managers currently offer “high integration” of ESG principles in their investment processes. The proportion was higher, at 13%, for larger investors with more than $25 billion in assets under management.
These figures are low relative to other asset classes, and even lower given that 45% envisage that ESG adoption will be associated with some degree of relative outperformance among hedge funds over the next three years – a lower figure than that seen in other asset classes.
The additional monitoring and reporting requirements are not yet typical of most hedge funds, nor do many have the capability for active engagement with portfolio companies to drive change, bfinance said.
Hedge funds may also reject the applicability of ESG considerations to the investment universe or strategy, such as short-term trading, it found.
Chris Stevens, director – diversifying strategies at bfinance, said: “Hedge fund firms may be coming late to the revolution, but their tardiness does confer a singular advantage. Their managers can look to see where mistakes have already been made by some mainstream asset management houses and avoid those missteps.”