Jack Inglis

Renewed interest in alternative investment exposures, growth in new launches and ever closer alignment of interests with investors have pushed hedge fund assets to more than $3 trillion global highs with plenty of green shoots, according to AIMA Australia General Manager Michael Gallagher.

“This improved outlook, around the globe and in Australia, has helped the industry to refocus on emerging developments, such as incorporating ESG into investing, operational efficiency and preparedness for regulation such as MiFID,” he said.

In the area of ESG – applying environmental, social and governance factors to investing – Gallagher said AIMA had worked alongside the United Nations Principles for Responsible Investment (PRI) and other organisations in helping to shape the PRI’s first industry-standard due diligence questionnaire (RI DDQ) for hedge funds.

The new DDQ, which is available from the AIMA website, helps investors during their manager selection and assessment process. It comprises a standardised set of questions to help identify those fund managers who have the staff, knowledge and structure in place to incorporate ESG factors into the investment decision-making process.

Mr Gallagher says ESG measures are increasingly being recognised as proxies for management quality, and can be another arrow in the quiver of hedge funds in their search for out-performance and diversification.

How managers integrate ESG into investment practices will be a key topic discussed at this year’s AIMA Australia Forum. Also likely to feature is MiFID II, the new cornerstone of European securities laws that will take effect in January 2018. MiFID II promises to have global impact. For example, Australian fund managers who trade with European brokers will find that the European trading environment is radically transformed – with greater transparency for bond and derivative trading, position limits for commodity contracts and new rules for trading of derivatives on European venues.

The AIMA Australia Annual Forum 2017 will be held at the Sofitel Sydney Wentworth on 12th September. Some of the confirmed speakers include:

• Thomas Weber, Co-Founder and Managing Partner of LGT
• Stuart Roden, Chairman of Lansdowne Partners
• Joel Poster, Head of the ESG Strategies, Future Fund
• Dr Ian Woods, Head of ESG Investment Research, AMP Capital
• Sushil Wadhwani, Founder, Wadhwani Asset Management
• Matthew Turner ,Managing Director of the Intermediate Capital Group
• Justin Ferrier, Managing Director Asian private credit platform, BlackRock
• Philippe Jordan, CEO of CFM
• Jack Inglis, Global CEO of AIMA

The Forum will likely reflect on how hedge fund managers have changed models to better align interests with investors. While signs of this alignment are global, a recent survey by AIMA and boutique prime broker GPP of 135 smaller funds sub-$500m found that:

• Half are charging 1.5 per cent of less (for start-up funds closer to 1.25 per cent);
• Two-thirds are charging less than 20 per cent performance fee;
• Close to 90 per cent of managers say they have a high watermark, and
• Around one-third have hurdle rates.

The survey also showed that most firms are able to turn a profit with less than $100m, with around one third of managers able to break even with less than $50m.

AIMA Chief Executive Jack Inglis said: “Our research disproves the notion that only relatively large, institutionalised businesses can succeed in the modern hedge fund industry. We have found that firms can build strong, sustainable and growing businesses with considerably less than $100m in assets. This is good news not only for the future health and well-being of the sector but for investors too, since smaller managers have often been the source of many of the industry’s greatest innovations.”

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Ian Woods

AMP Capital has formally excluded companies that have a material exposure to the most intensive fossil fuels from the investible universe of its Responsible Investment Leaders (RIL) range of funds.

In response to client demand, the RIL Charter of Operation, which guides the investment decisions of the RIL funds, has been amended to ensure the funds do not invest in companies that have a more than 20 per cent exposure to:

• Mining thermal coal
• Exploration and development of oil sands
• Brown-coal (or lignite) coal-fired power generation
• Transportation of oil from oil sands
• Conversion of coal to liquid fuels/feedstock

The impacted funds include the RIL diversified funds, the RIL Australian Share Fund, the RIL Diversified Fixed Income Fund and the RIL International Share Fund.

AMP Capital Head of Environmental, Social and Governance Research Ian Woods said: “The Charter of Operation requires the RIL funds to avoid investing in companies with a material exposure to activities that have a high negative social impact including the production and manufacture of tobacco, nuclear power (including uranium), armaments, alcohol, pornography and gambling. Increasingly, responsible investors also want their portfolios to mirror their views on the need to address climate change.

“Under the terms of the charter, most companies with material fossil fuel exposure are already excluded. However, we feel having a formal limit on fossil fuels more clearly reflects investors’ growing interest and concern regarding these investments.”

The formal limit will exclude 56 companies from the Responsible Investment Leaders’ investible universe.

Dr Woods added: “Our clients expect us to invest their funds in a manner that suits their social conscience while at the same time meeting investment objectives. This move enhances our ability to do that.”

AMP Capital is a signatory to the United Nations’ Principles for Responsible Investment and a member of the Investor Group on Climate Change (Australia/New Zealand). AMP Capital is currently Australia’s largest manager of responsible and sustainable investment funds with approximately $3 billion in funds under management.

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