ESG and hedge funds: what the data tells us


The ‘G’ is pretty much a given for adding value. But you could say that it is just ‘quality’ as a factor. The ‘E’ is hard to prove, particularly in a country like Australia, and the ‘S’ is anyone’s guess. But that is a cynical view from someone who lives and dies by big data.

On a regular visit to Australia last week, Philippe Jordan, a global director and president of CFM (Capital Fund Management, Paris-based alternatives manager) addressed the ESG trends, which are clear from big super funds, and questioned some of the statistics behind their adoption. He splits his time mainly between London and New York.

CFM is a leading alternative beta manager, developed by scientists rather than mathematicians, actuaries or engineers who tend to dominate the funds management industry. Jordan said: “I’m a data guy. I study what it all means. It is clear to us that most of the variance [within ESG]is in ‘governance’ and within that you could call it quality [a defined investment style]. The other components you could regard as noise… Quality can be proven over time as a factor.”

With the ‘E’, Jordan says the trend from a hard-core investment point of view is not good. “It’s not transitory. It’s a real phenomenon,” he says. “But we don’t have very good data. Getting standardised information disclosure about carbon production is difficult.”

And with the ‘S’, the most difficult of the three letters, even though it is an accepted social norm – certainly in the west – it tends to belong in national parliaments rather than markets, he says.

“Political leaders like to tell their constituents that they are doing something with ESG. We [CFM] are doing a lot of work on estimating the costs associated with it. What you can do in one fashion so that the costs are negligible, or another fashion which may have a positive impact, or a negative impact.”

CFM, which is a long-term supporter of AIMA globally, and in Australia, runs equity long/short funds, including assets, such as options and volatility, not just stocks. It also has trend-following strategies, which have proved particularly popular in Australia. While trend-following has not been easy for the last few years, the firm has still been able to make money for its clients, Jordan says.

“To earn a good return is always difficult,” he says. “The only time it’s easy is in hindsight. The constant challenges are costs, controlling risks, hiring good people and managing them. Clients are always interested in paying less for more… And the markets are a mean task master.”

CFM has done well by its Australian and New Zealand clients and, notwithstanding its French domicile, gets most of its fund flows from North America. Less than 10 per cent of its assets under management are from French clients.

CFM uses an extensive scientific, research-based approach to identifying and implementing strategies that have proven to be robust, sustainable and scalable.

“Financial markets are constantly evolving and have a degree of predictability that we continue to explore through data,” Jordan says. “This creates a strong environment to create alternative strategies which provide risk-adjusted returns with a low correlation to traditional investment market benchmarks…

“Part of what makes alternative beta strategies attractive is that historically, just as hedge fund returns were frequently de-correlated from equity and bond benchmarks, so too returns generated through exposure to alternative risk premia have also exhibited little performance correlation to one another, or to traditional investments in global stock and bond markets,” he says.

“This is important, because we know that combining non-correlated alternative strategies into a single portfolio helps diversify risk and generate more consistent returns over time.”

– G.B.