The Multi Strategist´s Conundrum


Stockholm (NordSIP) – In July 2016, the Swedish hedge fund group Brummer & Partners became a signatory to the United Nations Principles for Responsible Investment (UNPRI) and has thereby pledged to integrate responsible investment at the group level as well report on its progress on an annual basis. The group’s business model is based on partnerships with independent investment managers. Each investment manager is co-owned by its portfolio managers and Brummer & Partners (typically around 40% of equity). The Brummer Multi -Strategy (BMS) fund, managed and distributed by Brummer Multi -Strategy AB, also invests in the individual funds in varying proportions, depending on their expected risk-return profile and the overall allocation and composition of the BMS fund. Brummer & Partners provides the managers of the independent funds with risk control, compliance and fund administration.

As a result, the formalizing of responsible investment for the group means developing a policy for Brummer & Partners, as well as the multi -strategy fund but also helping each of the independent managers to draft their own principles based on their particular investment strategies, and to apply those principles in practice. Ann-Sofie Odenberg, Head of Responsible Investment and Edward Harrison, Responsible Investment Analyst, describe their journey so far, the challenges they have faced along the way and what they believe are the key factors for successful group-wide responsible investment in practice.

- Promotion -

Even if the signing of the UNPRI and the formal development of policies only date back to 2016, the actual underlying commitment to sustainability has been present at Brummer & Partners since inception. “Our mission is to off er well diversified investment management and to generate competitive risk adjusted returns to our investors”, starts Odenberg. “To include all relevant risks and opportunities in the investment analysis and decision making processes is part of the role description for a portfolio manager. However, the risks have not been labeled E, S or G but rather they have been a risk that should be analyzed such as any other risk. The decision to formalize responsible investment has been made to facilitate for investors who want to learn more about our work in this area and for us and the portfolio managers to educate ourselves and improve.”

Indeed, standards of good governance, transparency and integrity have always been important to Brummer & Partners, as exemplified by the co-founding of the Hedge Fund Standards Board (HSFB) in 2008. Hedge fund managers also become HFSB signatories when they are integrated to the Brummer & Parters group. The HFSB is an initiative aimed at creating and promoting standards of good governance, transparency, integrity and ownership practices for the hedge fund industry. Besides Brummer & Partners, founding members include 13 other major international hedge fund firms such as Man Group, Marshall Wace and Brevan Howard. It is a comply-or-explain regime and the investment managers’ report on their compliance with the standards to the HFSB on an annual basis.

Ann-Sofie Odenberg

One of the challenges the team faced was to overcome two major misconceptions. People unfamiliar with the concept believe that responsible investment is about exclusions and that it represents a trade-off in terms of returns. However, as Odenberg explains, any investor whose sole purpose is financial return should take ESG factors into account. Ignoring them may cause the portfolio manager to omit risks and/or opportunities which might ultimately have a material effect on the return. As the PRI prescribe, Brummer & Partners aims to include ESG information in its investment analysis and decision making processes, but it does not by default exclude investments in so called red-flagged companies (apart from direct investments in companies focusing on the production of controversial weapons). “There may be very good investment rationale behind going long in a red-flagged company”, adds Odenberg. “An example would be a company where management is genuinely intent on dealing with the issues causing the red-flag and where the portfolio managers therefore see upside potential in the price of the shares of that company. A company with ESG issues are also typical short cases for funds with a long-short equity strategy.”

Another entrenched belief is that responsible investing can only really be applied to equity and perhaps credit strategies. One of the challenges Odenberg’s team faces is showing how all strategies can integrate responsible investment in their own way. Typically, there are fewer peers to turn to for inspiration, for example in the case of systematic strategies where investment analysis and investment decisions are made by computers and algorithms. “Some would say that responsible investment is not at all applicable to such strategies but we disagree”, says Odenberg.

“It is true”, she admits, “that responsible investment is more straightforward and more easily implemented for equity and credit strategies but for example macro strategies can also integrate ESG-factors into their investment analysis. It may be especially challenging for some strategies to take specific factors into account, but governance and building a sustainable business are relevant to all.” The traditional screening and exclusion system is indeed applicable mostly to equity and credit funds, but since the idea at Brummer & Partners is to promote a holistic decision making and risk management process, any strategy can participate. “We have tried to avoid a one-size fits all approach, which would not work for a firm like ours”, adds Harrison. Certainly because it is so much easier to quantify, analyze and monitor ESG factors for equity- and credit-related strategies, investors and financial services firm that evaluate responsible investment acti viti es tend to focus exclusively on a fund’s investments and on whether ESG considerations are well integrated into the investment decisions. For Odenberg and her team, responsible investment is more than that. “Governance”, she says “is very important to us also at the company and fund level, not only in relation to the funds’ investments, and it surprises me that governance is not fully taken into account by some investors and stakeholders when evaluating how hedge funds approach responsible investment and sustainability.”

Edward Harrison

As an example, Odenberg mentions the questionnaire her team has filled out for a financial services firm who performs an annual ranking of different pension-asset managers’ sustainability efforts. This questionnaire, she explains, only focuses on ESG integration into the funds’ analysis and decision making processes. How the different companies work to make the pension market more sustainable and client friendly, for example in relation to transparency and fee structures, is not included in their evaluation and grading of the different pension actors’ sustainability work. “That lack of holistic approach surprises me”, Odenberg comments “if you are genuinely interested in making the pension market more sustainable.”

One of the most important factors of success for the implementation of responsible investment is the buy-in from the whole organization, especially the portfolio managers and of course support from partners and top management. Resources need to be deployed internally to allow for the implementation to be carried out effectively, and to give credibility to the initiative. “Due to our joint ownership model and the fact that many of our funds already have included ESG risks in their investment approach, although without explicitly labeling it as such, this was not a significant challenge”, Harrison comments. In fact, for Odenberg, the reactions in general have been more positive than expected.

Another key aspect was to get the risk management function on board. Given the independent management of the different firms, the support of the risk team, which provides risk measurement to the investment managers within the group, has been important as it performs screenings of all funds against ISS-Ethix database and includes any identified flagged investments in the risk reports submitted to portfolio managers. “The genuine interest and engagement from the risk team has been a very important success factor”, affirms Odenberg. Two examples of funds where the responsible investment policies are already quite well developed are the long/short equity fund Bodenholm One and the fixed income relative value hedge fund Nektar. At Bodenholm for example, poor governance is an important criterion the fund uses to select its short candidates. At Nektar, ESG criteria have been used for a long ti me since the managers believe that ESG factors are important to assess for its macro and fixed income strategies. For them, it has been mostly a matter of formalizing the process and explaining it, so that investors see Nektar’s integrati on of responsible investment in a framework they are familiar with.

The development and implementation of the responsible investment work is sti ll ongoing and is expected to be carried out intensively over the next few months. The work for Odenberg’s team is unlikely to stop any ti me soon thereafter. “We have started to implement responsible investment and we are learning along the way as it is a continuous learning process”, she observes. When the responsible policies for all the group fund companies will be fully developed and applied on a day to day basis, the fi rm will certainly become a model for others, especially when it comes to multi -strategy and for those strategies that are furthest from direct equity and credit investing. For Brummer & Partners and the team, the responsibility journey continues and the sails are fully deployed, with a well-equipped and passionate crew at the helm.

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The coronavirus epidemic has further accelerated the rise of ESG into the investment mainstream. As deficits skyrocket, bond investors have an opportunity to engage with governments on climate change, argues Thomas Dillon, Senior Macro ESG Analyst at Aviva Investors.

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