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For governance, investors evaluate the management structure and
policies for transparency, conflicts of interest, and independence.
More investors are beginning to expand their focus to traditional
hedge funds and demand that their investment managers and
their service providers have ESG practices in place. A May 2018
survey of 80 hedge fund managers by the Alternative Investment
Management Association (AIMA) found that more than 10 percent
of the surveyed investment managers had committed to an
The same survey found that in the preceding 12 months, the
investment managers had seen a 50 percent increase in demand for
ESG strategies from current and prospective investors.
Everyone in the industry is well acquainted with operational due
diligence (ODD) reviews of hedge funds and their service providers.
Going forward, it is expected that more and more ODD teams will
be asking about ESG practices as part of their reviews, or even
conducting separate ESG assessments. To be prepared, managers
should consider the following:
Policies: does your firm have established policies in relation to
diversity, and have you undertaken a review of compensation
packages to ensure are they are equitable and in line with your
policies on diversity and equality?
Infrastructure: have you chosen to operate from a Leadership in
Energy and Environmental Design-approved building or to use an
alternative energy source? What is your firm’s environmental impact?
Vendors: are you choosing to partner with vendors who are also
committed to ESG and asking them the same questions that investors
are asking you?
Community involvement: does your firm support local community
initiatives and charities? Do you encourage and provide opportunities
for staff to give back to the community?
Governance: does your firm have appropriate policies in place to
govern its operations? Do your service providers have equivalent
policies? Are the policies well known to your staff, has adequate
training been provided, and are there appropriate systems for
grievances to be heard?
Implementing ESG practices should not require wholesale change.
Not only will it make you more investible, but it is likely to make your
firm a more desirable place to work and improve staff morale and
productivity. You may also get a warm feeling inside for making the
world a better place.
The practice of outsourcing has been building for many years in the
hedge fund industry. For emerging managers it is often an important
component of their operations and an effective strategy for managing
costs in their initial years.
Large, established managers are also re-evaluating their
operations and looking to outsource functions as an option to
increase efficiencies. In January 2019, Bridgewater Associates
announced they will outsource significant parts of their human
resources, recruiting and finance processes, and we expect this
trend to continue to grow.
Whereas in the past most outsourced functions were eventually
brought in-house, some emerging managers today may be reluctant
to graduate from their outsourced structures, as the benefits of
CAYMAN FUNDS | 2019 41