Investment managers’ ability to deliver alpha — that is, non-market-driven investment returns — is ever diminishing, as illustrated in Institutional Investor’s September cover feature “Is Alpha Dead?” But at least one hedge fund manager thinks it has a fresh edge. New York–based hedge fund and alternative investment firm Mariner Investment Group believes there is value to be found in monitoring how companies handle issues relating to ESG: the environment; social responsibilities, such as human rights and employee diversity; and corporate governance.
ESG metrics have traditionally been viewed by the institutional investment community as nonfinancial factors not directly relevant to companies’ bottom lines. Whereas institutional investors are starting to pay more attention to ESG, with environmental-related concerns getting particular notice, it is still rare for money managers in general and hedge fund managers in particular to make ESG integral to their investment process.
Most money management firms that practice so-called socially responsible investing tend to focus on equities. Mariner is among a handful of firms that are starting to view the investment landscape very differently and see opportunities in using ESG analytics not just in equities but also across the entire investment universe.
Mariner partner and CEO Bracebridge Young Jr. says he believes that including ESG considerations in his firm’s investment process will improve results. “Our portfolio managers will have this additional information, which includes a security-by-security evaluation of ESG,” he says. “I believe this will give us better risk-adjusted returns.” But, he adds, “we are an investment-driven firm.”
In September Mariner, which together with its associated advisers has $10 billion in assets, announced it was becoming a signatory to the United Nations–endorsed Principles for Responsible Investment (PRI), one of the few hedge fund managers to have signed onto the principles, which commit signatories to integrate consideration of ESG factors and sustainable investing practices. In addition, Mariner is working with New York–based indexing and investor analytics company MSCI, using the ESG-related research, ranking and screening tools MSCI has developed. Notably, Mariner, which has the majority of its assets in fixed income, will be using MSCI’s research not just for equities but across all asset classes and investment strategies, including credit and short selling.
Young says that as the quality of ESG data improves, so does its value to fund managers. He has found that investors — especially those based in Europe and the U.S. — have shown particular interest in responsible asset allocation. “At conferences I’ve been to and with clients I talk to, this has become part of the dialogue,” Young says. As investors increasingly place value on those corporations that are perceived as being good actors in areas like climate change, funds assembled with ESG principles in mind should show better performance, he contends, creating a first-mover advantage, and an information edge, for firms like Mariner.
The relationship between hedge funds and responsible investing is still an uneasy one — all the more so as many hedge fund managers tend to have shorter investment horizons than other asset managers. A 2012 discussion paper on the topic, with a foreword written by the PRI’s head of implementation support, Katie Beith, found little consensus on the relevance of ESG information for hedge fund managers and “how it may meaningfully apply to different hedge fund investments and the widely divergent strategies that exist.” Outside of Mariner, the most high-profile hedge fund firm to see value in ESG data is $27.2 billion London–based GLG Partners, a wholly owned subsidiary of Man Group, itself a PRI signatory.
A test of hedge fund managers’ abilities to combine their desire for profit with the business objectives of a company that has a clear socially conscious mandate is in the works right now. Founded in 1872, U.K.–based Co-operative Bank brands itself as an “ethical” bank and will not lend to certain businesses, such as those involved in the arms trade and fossil fuel extraction. On November 4 a consortium of bondholders, including Greenwich, Connecticut–based hedge fund firm Silver Point Capital and New York–based Aurelius Capital Management, agreed to provide the bank as much as $2.5 billion in rescue financing. It remains to be seen if the bank, which was on the verge of collapse and had been required by the U.K. government to raise new funds, can make a profit for its lenders while sticking to its beliefs.
That same day, U.S. lawmakers and Stamford, Connecticut–based hedge fund firm SAC Capital Advisors announced that they had reached a tentative agreement regarding an insider trading investigation into the firm and three of its subsidiaries.
It was in search of an investment edge that allegedly led certain SAC portfolio managers and analysts to turn to insider information. In a press conference to announce SAC’s historic agreement with law enforcement officials, in which SAC and related entities pleaded guilty to five counts of insider trading and agreed to pay a record $1.2 billion in fines, Preet Bharara, U.S. Attorney for the Southern District of New York said, “Greed sometimes is not good,” playing off the famous Gordon Gekko line from the movie Wall Street. April Brooks, the special agent in charge at the New York field office of the Criminal Division of the FBI, went further, saying, “Principles are just as important as your profit. How your employee makes money is just as important as how much they make.”
Mariner’s embrace of sustainable investing suggests that principles can be their own source of profit.
