The Principles for Responsible Investment (PRI) recently announced in London the launch of the first industry-standard due diligence questionnaire (DDQ) for hedge funds that have an environmental, social and governance (ESG) or “responsible investment” (RI) focus. The DDQ is the result of lengthy collaboration between investors, investment managers, industry associations like the Alternative Investment Management Association (AIMA) and the Hedge Fund Standards Board (HFSB) and industry consultants.
The DDQ will be available on eVestment and a number of other platforms including the PRI website and through AIMA and the HFSB.
Due Diligence Questionnaire
“Among institutional investors, the interest in ESG products is increasing constantly,” said Christophe Frerebeau, eVestment’s head of EMEA. “As one can see on eVestment, asset flows and screening activity of traditional ESG products are both on the rise. Expanding the ability for hedge fund managers to share information on ESG considerations with consultants and investors is the next logical step in the evolution of ESG investing.”
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Including the ESG DDQ for hedge funds on the eVestment database is one more step eVestment has taken to ensure asset managers have the ability to share their ESG strategies given the continued rise in interest in ESG from institutional investors and consultants. In October of 2016, eVestment revamped its traditional ESG data collection capabilities to allow for more information sharing.
This new DDQ for hedge funds comprises a standardised set of questions, which will make it easier to identify those fund managers who have the staff, knowledge and structure in place to incorporate (ESG) factors in the investment decision-making process. Facilitating this process will result in a reduced reporting burden and an improvement of peers’ comparison, cross checking of information and data consistency across the hedge fund industry.
The history of the due diligence questionnaire dates back to 2012, when the PRI published a discussion paper to raise awareness about applying responsible investment into hedge funds. Subsequently, a working group led by the PRI, with the support of asset owners, investment managers, investment consultants, the AIMA and the HFSB developed a standardised set of questions which were applicable to any hedge fund strategy and easy to access and use by all of these stakeholders. Using a combination of analysis, roundtables and interviews, the working group selected 14 questions divided into four sections:
- Policy (identifies why an investment manager considers RI);
- Governance (assesses who takes responsibility for the investment decisions, at what level these decisions are taken in the organisation, and if the investment manager has the capacity and governance structure to implement and oversee them);
- Investment process (evaluates how investment decisions are made and implemented in light of RI); and
- Monitoring & reporting (evaluates how asset owners can assess implementation, both initial and ongoing, of RI into the investment process).
“The future of institutional allocations to hedge funds will be in the hands of those who can innovate and deliver sustainable risk adjusted returns,” said Fiona Reynolds, managing director of the PRI. “At the PRI, we know that investors are getting pressure from their managers to include ESG criteria when choosing portfolio positions, and that many leading pension funds do not invest in hedge funds because of their lack of compliance with ESG criteria. The will be a valuable tool for helping the alternative investment market continue to move forward on responsible investment.”
Article by Mark Scott, eVestment