This guide provides a suggested framework for fund managers and asset owners to incorporate ESG factors into hedge fund strategies. The heterogeneous nature of hedge funds as an asset class means there are important differences from long-only funds in terms of how they might incorporate, develop and implement a responsible investment (RI) policy. Due to the sheer breadth and range of trading instruments and market strategies spanning equities, fixed income, commodities and FX, some hedge funds are likely to be better placed to integrate an RI policy than others.
The paper identifies client demand, materiality and regulation as key drivers to the increasing interest in RI in hedge funds. With respect to client demand, although ESG funds have been growing in the long-only market for some years, institutional investors are becoming increasingly interested how hedge fund managers are applying ESG factors in their portfolios. With regards to how regulatory environments may differ between funds and strategies and an analysis of materiality, the PRI has created various materials to support asset owners and hedge fund managers in broadening their understanding - including the Responsible Investment Regulation Map and a register of academic research.
The central pillar of this guide focuses on how a responsible investment framework might be incorporated, developed and implemented by hedge fund managers to respond to these drivers. It is divided into four modules or steps: I) Policy; II) Governance; III) Investment Process; IV) Monitoring & Reporting.