Investing in hedge funds whilst remaining
compliant to strict SRI guidelines
Erik Eidolf, Harcourt Investment Consulting A...
Content




1.   Introduction

2.   Considerations: Combining SRI objectives with Investment objectives

3.   Possible opt...
Background Harcourt and SRI engagement

Headquarters:        Zurich, Switzerland          AUM:          USD 5.0 bn
Founded...
Questions




A)   How can SRI investors invest in hedge funds whilst complying to SRI
     requirements?

B)   What can S...
Content




1.   Introduction

2.   Considerations: Combining SRI objectives with Investment objectives

3.   Possible opt...
Defining the objectives from both SRI and Investment point of view

The first step is to define the SRI objectives as well...
Overview SRI considerations

                                           Defining
                      SRI             tra...
Overview Investment considerations

Based on the SRI Framework, the investor must consider the top down requirements as we...
Content




1.   Introduction

2.   Considerations: Combining SRI objectives with Investment objectives

3.   Possible opt...
Existing hedge funds solutions with some form of SRI policy in place


Outside the long-only world, few SRI compliant solu...
Creating an SRI portfolio – hedge fund selection
Based on the SRI Framework, the investor has to identify a combination of...
Creating an SRI portfolio – Ongoing SRI compliance



                                           Continuous
              ...
Creating an SRI portfolio – Ongoing SRI compliance

                 Corporate
                 Governance

              ...
Content




1.   Introduction

2.   Considerations: Combining SRI objectives with Investment objectives

3.   Possible opt...
What could drive a hedge fund to embrace SRI?

In our experience, important factors appear to be:


Value-driven
      • E...
Content




1.   Introduction

2.   Considerations: Combining SRI objectives with Investment objectives

3.   Possible opt...
Summary: Overview on our approach to SRI hedge fund investing


Challenges regarding suitable SRI Framework
• Out of respe...
Disclaimer




An investment in an alternative investment carries substantial risks. The nature and extent
of some of thes...
Contacts




Harcourt Investment Consulting AB   Harcourt Investment Consulting AG
Norrlandsgatan 22, Box 7046         Sta...
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Investing in hedge funds whilst remaining compliant to strict SRI guidelines.

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Erik Eidolf, Managing Director - Harcourt Investment Consulting - Sweden

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Investing in hedge funds whilst remaining compliant to strict SRI guidelines.

  1. 1. Investing in hedge funds whilst remaining compliant to strict SRI guidelines Erik Eidolf, Harcourt Investment Consulting AB TBLI Paris November 2007
  2. 2. Content 1. Introduction 2. Considerations: Combining SRI objectives with Investment objectives 3. Possible options: Find existing solution or create your own 4. Quests to make hedge funds embrace SRI 5. Summary 2
  3. 3. Background Harcourt and SRI engagement Headquarters: Zurich, Switzerland AUM: USD 5.0 bn Founded: 1997 Ownership: Vontobel Group, Management & staff Staff: 85 Mission: To be one of the leading global providers of customized alternative investment solutions to institutional investors Why engaged in SRI? • Together with our institutional investor base, Harcourt has for a number of years monitored the SRI market and drafted SRI compliant absolute return solutions • Vontobel Bank Group has a long history in SRI engagements • During 2006, Harcourt arranged workshops with SRI-investors to again asses possibilities to create thorough SRI hedge fund solution • Based on input from these, Harcourt decided to attempt to set up fund of hedge funds with SRI integrated on manager level despite frequent external signals that “it can’t be done” • During this work, Harcourt has teamed up with a leading European insurance company with vast SRI experience to combine expertise both in terms of hedge funds and SRI • As a natural part in this work, Harcourt was in July 2007 the first hedge fund company to join UN’s Principles for Responsible Investments Ø SRI compliant investing in hedge funds is coupled with challenges but also opportunities – below we seek to present some of them based on the practical experiences that we have made! 3
  4. 4. Questions A) How can SRI investors invest in hedge funds whilst complying to SRI requirements? B) What can SRI investors do to make hedge funds integrate SRI into their investment practices? 4
  5. 5. Content 1. Introduction 2. Considerations: Combining SRI objectives with Investment objectives 3. Possible options: Find existing solution or create your own 4. Quests to make hedge funds embrace SRI 5. Summary 5
  6. 6. Defining the objectives from both SRI and Investment point of view The first step is to define the SRI objectives as well as investment objectives and combine these in order to find the most optimal hedge fund solution SRI considerations and objectives • Definition of SRI Framework • View on hedge funds as asset class in general • View on investment techniques used by hedge funds • View on incorporating own SRI screening to the hedge fund’s tradable universe • View on SRI compliance monitoring and sanctions in case of SRI breaches • View on SRI reinforcement Investment considerations and objectives: • Risk and return objectives with the hedge fund allocation • Portfolio fit and its implications on strategic asset allocation • Diversification requirements • Reporting and transparency requirements • Liquidity requirements 6
  7. 7. Overview SRI considerations Defining SRI tradable universe Monitoring SRI SRI framework & investment goal compliance reinforcement SRI framework should steer the rationale and objectives to invest in hedge funds • SRI Framework is based on the values of the investor and outlines the SRI ambition • SRI Framework further has implications on how SRI should be considered in hedge fund context Defining the tradable universe – SRI Framework and implications on capital management • Based on the SRI Framework defined, the investor must consider the practical implications: • Which companies to be allowed? • Which asset classes and instruments to be allowed? • Which types of exposures to be allowed? • Based on the SRI Framework defined, the tradable universe is often screened on an ongoing basis Monitoring of compliance • The SRI process should be integrated in the actual capital management and allow for monitoring that the exposures are within the scope of the SRI Framework SRI Reinforcement • The investor can choose to engage in positive reinforcement through active ownership and corporate governance of core/long term positions 7
  8. 8. Overview Investment considerations Based on the SRI Framework, the investor must consider the top down requirements as well as bottom up requirements when combining the investment objectives and SRI objectives Investment Objectives expected return, risk profile, liquidity, size, legal considerations, currency Strategic Asset Allocation Investment style, trading instruments, strategies Bottom-up Manager Selection Hedge Fund Universe: 9,000 Traditional hedge funds, SRI hedge funds 8
  9. 9. Content 1. Introduction 2. Considerations: Combining SRI objectives with Investment objectives 3. Possible options: Find existing solution or create your own 4. Quests to make hedge funds embrace SRI 5. Summary 9
  10. 10. Existing hedge funds solutions with some form of SRI policy in place Outside the long-only world, few SRI compliant solutions in the alternative investment space exist. Main solutions available in the hedge fund space include: • Thematic hedge funds: Hedge funds that focus on certain themes such as Cleantech and Green Energy • Religious hedge funds: Hedge funds that adhere to religious considerations such as Sharia compliance • SRI hedge funds: Hedge funds that have developed their own SRI Frameworks • Charity hedge funds: Hedge funds that either non-publically or publically allot parts of their profits to charities Common for most of the SRI compliant hedge funds is that they adhere to individually defined SRI guidelines and that the actual implementation of this SRI framework deviate substantially between managers Ø Given the scarcity and heterogeneity of SRI compliant hedge fund solutions, SRI investors have had to try to create own hedge fund solutions preventing most SRI investors from such exposure 10
  11. 11. Creating an SRI portfolio – hedge fund selection Based on the SRI Framework, the investor has to identify a combination of hedge funds that either: 1) Do not invest in companies or instruments that by their own nature are not in breach with the SRI Framework defined 2) Limit themselves to only trade the approved universe as the SRI Framework defines through e.g. separate accounts Fixed Income Equities Commodities Relative Value Fixed Relative Value Equity Relative Value Commodity Income Strategies: Strategies: Strategies: 1. Multi-Strategy Fixed Income 9. Multi-Strategy Equity 22. Multi-Strategy Commodity 2. Fixed Income Arbitrage 10. Event Driven Equity 23. Relative Value Energy Relative 3. ABS & MBS 11. Convertible & Volatility Arbitrage Value 4. Asset-Based Lending 12. Structured Equity Linked 13. Statistical Arbitrage 14. Market Neutral Equity Directional Fixed Income Directional Equity Strategies: Directional Commodity Strategies: 15. Long/Short Global Equity Strategies: 5. Long/Short Rates 16. Long/Short US Equity 24. Metals Trading 6. Long/Short Credit 17. Long/Short European Equity 25. Agricultural Trading 7. Distressed Securities 18. Long/Short Japanese Equity 26. Energy Trading Directional 8. Emerging Markets Debt 19. Long/Short EM Equity 27. Power & Emissions Trading 20. Long/Short Sectors 21. Short-Biased Equity Directional Multi -Asset Class Strategies: 28. LT Trend-Following CTAs 29. ST Systematic Trading CTAs 30. Global Macro 31. Insurance-Linked 1: Conforms with criteria, investment normally possible with onl y Code of Conduct Agreement 2: Partially/potentially violates criteria, bilateral Invest ment Agreement needed 3: Violates criteria, investment not possible Ø Thorough understanding is needed to analyze, and agree on SRI process applicable for, hedge fund managers 11
  12. 12. Creating an SRI portfolio – Ongoing SRI compliance Continuous SRI-work SRI Framework Portfolio of SRI complying hedge funds Manager sourcing SRI funds (~ xx funds) Global universe of hedge funds (~ 9000 funds) Ø Important that managers understand and respect the SRI process and that SRI execution is efficient for them 12
  13. 13. Creating an SRI portfolio – Ongoing SRI compliance Corporate Governance Continuous Companies SRI-work SRI-screening Portfolio of SRI of companies complying hedge funds Regular update to managers of universe Portfolio carve-out:s from managers to secure of approved companies to trade. SRI compliance Managers agree to adhere to SRI funds SRI Framework (~ xx funds) Global universe of hedge funds (~ 9000 funds) Ø Important that managers understand and respect the SRI process and that SRI execution is efficient for them Ø Transparency not automatically the best way to ensure no SRI conflicting positions…. 13
  14. 14. Content 1. Introduction 2. Considerations: Combining SRI objectives with Investment objectives 3. Possible options: Find existing solution or create your own 4. Quests to make hedge funds embrace SRI 5. Summary 14
  15. 15. What could drive a hedge fund to embrace SRI? In our experience, important factors appear to be: Value-driven • Engagement in paving new ground for sustainability investors • Engagements in challenges of e.g. global warming, global injustices Respect for SRI process • Elaborated SRI process • Reasonable level; must still allow a fair tradeable universe • Efficient execution; must have respect for focus on active trading • With ESG issues growing in importance it can be viewed as an efficient way to systematically incorporate extra financial factors Business aspects • Critical mass requirements • Harmonization of SRI Frameworks could lead to attraction from more investors • Differentiator • Goodwill and publicity To be positioned for the future • SRI industry rapidly growing and widely expected to become mainstream • Opportunity for hedge funds to get real track record of SRI compliance • Chance to be early mover within hedge fund industry 15
  16. 16. Content 1. Introduction 2. Considerations: Combining SRI objectives with Investment objectives 3. Possible options: Find existing solution or create your own 4. Quests to make hedge funds embrace SRI 5. Summary 16
  17. 17. Summary: Overview on our approach to SRI hedge fund investing Challenges regarding suitable SRI Framework • Out of respect for the complexity of SRI, we decided to partner up with specialized SRI investor, with a joint quest to combine their SRI expertise with our hedge fund expertise • Important that the SRI Framework used has been actively traded for several years with a team of dedicated SRI experts overseeing continuous development Challenges regarding sourcing managers willing to comply • Managers are sourced from Harcourt’s approved and candidate universe; relationships facilitate constructive and trustful dialogue with managers • We encourage interaction between all stakeholders in the SRI initiative. The ambition is to allow for development of the SRI Framework over time through the ongoing input from investors, hedge funds and SRI experts Solution • All participating managers have to contractually accept to comply to the SRI Framework; for strategies entailing equities or corporate bonds, managed accounts are also set up. Holdings are regularly monitored to ensure no SRI breaches • Tradeable universe updated on quarterly basis on database format which is easy to search and have overview of for managers • Semi concentrated portfolio of hedge funds providing investors a balanced exposure to trading strategies and managers with absolute return objective 17
  18. 18. Disclaimer An investment in an alternative investment carries substantial risks. The nature and extent of some of these risks differ from traditional investments in stocks and bonds. There can be no assurance that the advice or information provided above will lead to superior performance. In particular, the performance of an alternative investment may vary substantially over time. Investors bear the risk of losing all or part of their investment and thus should carefully consider the appropriateness of such investments for their portfolio. While the information contained in this document has been obtained from sources deemed reliable, no representation is made as to its accuracy or completeness, and it should not be relied on as such. Past performance is not necessarily indicative of future performance. 18
  19. 19. Contacts Harcourt Investment Consulting AB Harcourt Investment Consulting AG Norrlandsgatan 22, Box 7046 Stampfenbachstrasse 48 103 86 Stockholm - Sweden 8006 Zürich - Switzerland Tel: +46 (8) 611 06 70 Tel: +41 (1) 365 1000 Fax: +46 (8) 611 06 71 Fax: +41 (1) 365 1001 www.harcourt.se www.harcourt.ch 19

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