The USD 118 million JPMorgan Multi-manager Sustainable Long-Short Fund has gained nearly 14 percent from its Feb. 18 inception to Nov. 19, twice the advance of the MSCI World Index. A Eurekahedge index tracking the performance of all hedge fund strategies rose just 3 percent between the end of January and October.
The global fund is the first of its kind dedicated to environmental, social and governance issues by farming out money to several external hedge fund managers, according to Lyn Ngooi, a Singapore-based hedge fund specialist with the unit.
ESG is one of the fastest-growing trends in the investment world, with family offices joining large pension and sovereign funds in embracing the idea. ESG-focused funds drew USD 71 billion of new investor money between April and July alone, according to a BNP Paribas survey in October. Still, 60 percent of hedge funds didn’t integrate ESG in their investments, according to the survey.
When hedge funds do embrace ESG, they typically screen out companies with bad ESG scores -- weapons makers and casino operators, for example -- narrowing their investing universe. There are also a small but growing number of dedicated ESG hedge funds, mostly managed out of Europe. Both risk denting returns, Ngooi said.
"To focus on these only would narrow the universe for investors and does not necessarily lead to the best stock pickers for a portfolio," Ngooi said.
ESG adoption is especially poor among managers with less than USD 10 billion of assets, a space home to many smaller, more nimble funds with the best returns, according to the BNP survey.
The JPMorgan team identified ESG themes that generate winners and losers: social empowerment, resource efficiency, technology for sustainability, health and wellness and energy transition. It then selects outside managers who are good stock pickers and are willing to run investments in separate accounts, tilting toward more sustainable themes than their existing hedge funds.
After researching 125 hedge funds globally, the team at the New York-based bank allocated money to five managers, including specialists in healthcare, utilities and China. None of the firms markets itself as a dedicated ESG fund.
Ngooi declined to identify the managers and the specific stock picks, citing regulatory constraints.
For social empowerment, the fund holds a leading Chinese online and offline education provider. Within resource efficiency, it invested in a maker of drainage pipes for commercial and residential properties whose use of more reliable materials cuts leakage. China’s largest healthcare e-commerce platform is among its technology for sustainability investments, helping address the shortage of primary-care physicians.
It owns a stake in a provider of lower-cost, less invasive liquid biopsy cancer diagnosis and management solutions among its health and wellness holdings. Within the energy transition theme, it owns a stake in one of North America’s largest wind and solar energy providers that has high growth potential yet is trading at a wide discount.
Among its most profitable trades is a bullish bet on a Chinese electric vehicle maker. A bearish wager on a global biotechnology company made 40 percent in less than four months after the U.S. Food and Drug Administration delayed approval of a new drug it’s developing, Ngooi said.