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    GLOBAL MARKETS | 3 POINT PERSPECTIVE | SOLVING SUSTAINABLE

    Sustaining interest: ESG drives hedge fund allocations

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    Contributors: Strategic Consulting Team

    11 Nov 2022

    Investors are increasingly using environmental, social, and governance (ESG) factors when deciding how to allocate AUM to hedge funds. In response to this demand, we have seen more HFs launching ESG products in the past few years. Our report provides a performance analysis of these products and investigates what allocators expect from them.

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    Contributors: Strategic Consulting Team

    11 Nov 2022

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    If you are interested in reading the full ESG Report, which is available to clients of Barclays Corporate and Investment Bank, or if you would like to learn more about Strategic Consulting services and reports, please contact strategicconsulting@barclays.com. 

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    1. Interest in ESG continues to grow

    Financial decision makers are increasingly making hedge fund allocations based on their ESG preferences. Their interest has soared from 8% to 30% since 2018, based on our survey of circa 200 investors through 3rd quarter 2022.

    Among funds of hedge funds (FoHFs), 41% factor ESG into their allocation choices. Among advisors and consultants, 55% do.

    On a relative basis, EMEA investors are more driven by ESG considerations, but investors in the Americas have been catching up recently.

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    % of Inv. Based on ESG Preferences
    % of Inv. Based on ESG Preferences

    Source: Barclays Strategic Consulting

    2. ESG investing follows multiple-faceted approach

    ESG Hedge Fund products offer myriad features, including differing emphases on pillar focus, scoring mechanisms, portfolio construction, and levels of interaction with underlying companies.

    From a pillar focus perspective, there are two existing ESG product types: ‘generalists’, which address all three ESG pillars, and ‘specialists’ that mostly focus on just one. Among specialists, which represent about 60% of our ESG product sample, all focus on the environmental pillar. Some specific themes emerge among those that focused on “E”, with products aimed at climate change, clean energy, and/or carbon emissions.

    For ESG HF products, portfolio construction begins by establishing scores for companies within their investable universe. Most managers create their own scoring systems, but some utilize 3rd party vendor solutions. Once the scores are established, there are many options as to how to build out their portfolios. For instance, managers may choose to invest in companies with the highest scores, select those with lower scores with the hopes of capitalising on potential improvements over time, or they may do a combination of the two.

    Among those looking to benefit from improved ESG scores over time, some managers choose to engage with companies to encourage ESG improvements in an effort to potentially maximise returns. On a relative basis over the last three years, these managers have outperformed their counterparts that do not engage across both alpha and return metrics.

    Overview of ESG Product Universe

    3. ESG funds can outperform Discretionary Equity

    Over the past three years, data show that ESG funds in our sample delivered 8% returns with 5.7% alpha while Discretionary Equity funds came in with 7.2% returns and 2.8% alpha.*

    The Strategic Consulting team tracks 52 ESG funds, of which roughly 75% of are Discretionary Equity funds, which explains why that benchmark was chosen.

    *Source: HFR, HFM, Capital Solutions

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    Performance of Discretionary Equity vs. ESG (through August 2022)
    Performance of Discretionary Equity vs. ESG (through August 2022)

    Source: HFR, HFM, Capital Solutions, Jensen’s alpha is calculated as follows: Returns – LIBOR - beta to MSCI*(MSCI returns-LIBOR). 

    ESG funds’ potential continues evolving

    Our survey shows that ESG is continuing to gain traction in the hedge fund universe. These products are taking on many new forms, flexing to meet increasing and varied demand, while demonstrating the potential to outperform their relative benchmarks.

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    About the experts

    Ermanno Dal Pont

    Managing Director, EMEA Head of Capital Solutions

    Mr. Dal Pont is responsible for the Barclays Capital Solutions team in Europe and the Strategic Consulting team globally. Mr. Dal Pont joined Barclays in 2010 from Prudential PLC, where he was Head of Strategic Projects. Prior to Prudential, he was at Lehman Brothers, first in the Strategy and Corporate Development Group, and then in the Principal Investing division. Mr. Dal Pont spent his first six years of his career as a consultant for McKinsey & Company, advising Asset Managers and other financial institutions. Mr. Dal Pont holds an MBA from Columbia Business School and a degree in Economics from Bocconi University, Italy.

    Kate Holleran

    Managing Director, US Head of Capital Solutions

    Ms. Holleran is the US Head of Capital Solutions at Barclays. She joined Barclays in 2008 from Lehman Brothers, where she was part of the Capital Introduction team in the US. She began her career in Lehman Brothers Europe where she spent four years as a product controller supporting the equity finance business. Ms. Holleran received a degree in Business and Economics from the University of Dublin, Trinity College. She holds a designation from the Chartered Institute of Management Accountants (CIMA) and is a Chartered Alternative Investment Analyst (CAIA).

    Roark Stahler

    Director, US Head of Strategic Consulting

    Mr. Stahler is the US Head of Strategic Consulting at Barclays. Mr. Stahler joined Barclays in 2008 as a member of the Strategy team working on various projects across the Investment Bank. Prior to joining Barclays, he worked as a consultant for McKinsey & Company, advising Asset Managers and other financial institutions as well as several other client types. Mr. Stahler holds an MBA as well as a BA from the Stern School of Business at New York University.

    R. Hazan Sucu

    Assistant Vice President

    Ms. Sucu is an Assistant Vice President on the Barclays Capital Solutions Strategic Consulting team, which she joined in 2018. Ms. Sucu holds a BA in Economics and a BA in Political Science from Middlebury College. She is a Certified Financial Analyst (CFA) in ESG investing.

    Daniel Bergelson

    Assistant Vice President

    Mr. Bergelson is an Assistant Vice President on the Barclays Capital Solutions Strategic Consulting team, which he joined in 2019. Mr. Bergelson holds a BS in Business Administration in Finance & Marketing from Georgetown University and is a Chartered Alternative Investment Analyst (CAIA).

    Laura McBryan

    Analyst

    Ms. McBryan is an Analyst on the Barclays Capital Solutions Strategic Consulting team, which she joined in 2022. Ms. McBryan holds a BBA in Business Analytics from the University of Notre Dame.

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