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

Investing in hedge funds whilst remaining compliant to strict SRI guidelinesErik Eidolf, Harcourt Investment Consulting ABTBLI Paris November 2007

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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

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Mission: To be one of the leading global providers of customized alternative investment solutions to institutional investors

Background Harcourt and SRI engagement

Headquarters: Zurich, Switzerland

Founded: 1997

Staff: 85

AUM: USD 5.0 bn

Ownership: Vontobel Group, Management & staff

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!

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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?

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Content

1. Introduction




5. Summary

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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

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Overview SRI considerations

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

SRIreinforcement

Monitoring SRI compliance

Definingtradable universe & investment goal

SRIframework

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Investment Objectivesexpected return, risk profile, liquidity,size, legal considerations, currency

Strategic Asset AllocationInvestment style, trading

instruments, strategies

Overview Investment considerations

Bottom-up

Manager Selection

Hedge Fund Universe: 9,000Traditional hedge funds, SRI hedge funds

Based on the SRI Framework, the investor must consider the top down requirements as well asbottom up requirements when combining the investment objectives and SRI objectives

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Content

1. Introduction




5. Summary

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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 andGreen Energy

• Religious hedge funds: Hedge funds that adhere to religious considerations such as Shariacompliance

• 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 profitsto 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

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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

1: Conforms with criteria, investment normally possible with onl y Code of Conduct Agreement

2: Partially/potentially violates criteria, bilateral Investment Agreement needed3: Violates criteria, investment not possible

Directional Multi-Asset Class Strategies:28. LT Trend-Following CTAs29. ST Systematic Trading CTAs30. Global Macro 31. Insurance-Linked

Directional Commodity Strategies:24. Metals Trading25. Agricultural Trading 26. Energy Trading27. Power & Emissions Trading

Directional Equity Strategies:15. Long/Short Global Equity16. Long/Short US Equity17. Long/Short European Equity18. Long/Short Japanese Equity19. Long/Short EM Equity20. Long/Short Sectors21. Short-Biased Equity

Directional Fixed IncomeStrategies:5. Long/Short Rates6. Long/Short Credit7. Distressed Securities8. Emerging Markets DebtDirectional

Relative Value Commodity Strategies:22. Multi-Strategy Commodity23. Relative Value Energy

Relative Value Equity Strategies:

9. Multi-Strategy Equity 10. Event Driven Equity11. Convertible & Volatility Arbitrage12. Structured Equity Linked13. Statistical Arbitrage14. Market Neutral Equity

Relative Value FixedIncome Strategies:1. Multi-Strategy Fixed Income2. Fixed Income Arbitrage 3. ABS & MBS4. Asset-Based Lending

Relative Value

CommoditiesEquitiesFixed Income









Relative Value


1: Conforms with criteria, investment normally possible with onl y Code of Conduct Agreement

2: Partially/potentially violates criteria, bilateral Investment Agreement needed3: Violates criteria, investment not possible









Relative Value










Relative Value


Ø Thorough understanding is needed to analyze, and agree on SRI process applicable for, hedge fund managers

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Portfolio of SRI complying hedge funds

SRI funds(~ xx funds)

ContinuousSRI-work

Global universe of hedge funds(~ 9000 funds)

Creating an SRI portfolio – Ongoing SRI compliance

Manager sourcing

SRI Framework

Ø Important that managers understand and respect the SRI process and that SRI execution is efficient for them

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Portfolio of SRI complying hedge funds

SRI funds(~ xx funds)

ContinuousSRI-work

Global universe of hedge funds(~ 9000 funds)

Creating an SRI portfolio – Ongoing SRI compliance

Companies

SRI-screeningof companies

Corporate Governance

Regular update to managers of universe of approved companies to trade.

Portfolio carve-out:s from managers to secure SRI compliance

Managers agree to adhere to SRI Framework

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….

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Content

1. Introduction




5. Summary

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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

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Content

1. Introduction




5. Summary

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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

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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.

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Contacts

Harcourt Investment Consulting AGStampfenbachstrasse 48 8006 Zürich - Switzerland

Tel: +41 (1) 365 1000 Fax: +41 (1) 365 1001

www.harcourt.ch

Harcourt Investment Consulting ABNorrlandsgatan 22, Box 7046 103 86 Stockholm - Sweden

Tel: +46 (8) 611 06 70 Fax: +46 (8) 611 06 71

www.harcourt.se

http://www.harcourt.ch

http://www.harcourt.se

Date post:	21-Oct-2014
Category:	Economy & Finance
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Investing in hedge funds whilst remaining compliant to strict SRI guidelines.

Economy & Finance