ESG hedge fund trends – data challenges and opportunities
A recent survey of 80 hedge funds by AIMA found that responsible investing is increasingly becoming a mainstream issue – almost 40% of survey respondents are already engaging in RI practices. However, the survey also cited data quality issues as the biggest barrier to increasing such initiatives. For quants, these data limitations have made building systematic strategies particularly challenging. At Neudata, we see evidence of this changing as a direct result of alternative data addressing the many quality-related shortfalls plaguing the industry.
A lack of adequate ESG risk scoring methodologies is another barrier to more widespread adoption of ESG investing practices. Challenges, however, can often bring new opportunities, as the need to develop standardized ESG metrics has left an opening for the most innovative hedge funds to pioneer new approaches and develop alpha-generating responsible investing methodologies.
ESG moves into the mainstream
The AIMA survey found that over half of respondents had experienced increased interest in their firm’s responsible investment capabilities. When isolating American hedge funds (a region that has historically lagged behind Europe in ESG integration) this figure rises to 71%. To meet increasing investor demands, almost a third of respondents have hired, or plan to hire a responsible investment expert in the next 12 months and 37% are planning to, or have already signed, the UN PRI.
Approximately 40% of respondents are currently allocating into responsible investments – representing $59bn in total assets. However, responsible investing remains a privilege open to larger funds, given that 60% have over $1bn in AUM, whereas the same remains true for just 23% of funds with an AUM between $1m-$100m. This is unsurprising, given the excessive cost for the scale of the firm was cited as the third most common barrier to adopting responsible investing strategies.