(Bloomberg) — A fund launched by AQR Capital Management LLC aims to give investors a taste of how well ESG can be combined with the goal of achieving above-average returns.
The quant firm, co-founded by hedge fund veteran Cliff Asness, has now raised about $350 million for its Adaptive Equity Market Neutral UCITS Fund, according to data compiled by Bloomberg. The fund, whose launch was announced last month, is designed to short stocks that AQR says have poor environmental, social and governance profiles and invest in ESG stocks with higher ratings.
“It’s not that we believe that being long on every ESG characteristic and short on every ESG characteristic is financially attractive on its own,” says Michele Aghassi, director and head of sustainable investing at AQR. “It depends on which ESG characteristic.”
The extent to which investors can increase their returns while trying to make the world greener and fairer remains a contentious issue in finance and academia. It also carries a lot of political baggage. In the US, several Republican states have imposed bans and penalties on companies that implement ESG approaches, with the belief that this strategy downplays fiduciary goals.
In Europe, ESG is now firmly integrated into financial regulations. The AQR fund is aimed at investors in the European Union.
ESG skeptics point to the poor performance of sectors traditionally associated with the strategy, such as wind and solar. Both have struggled in recent years after higher interest rates upended the financial logic that helped capital-intensive renewable energy projects thrive when rates were low. The S&P Global Clean Energy Index has fallen nearly 30% since the start of 2023. Over the same period, the S&P 500 has gained more than 40%.
Against this backdrop, even staunch ESG investors want to play it safe. According to Aghassi, the AQR fund offers buffers to ensure that investors’ ESG preferences do not jeopardize returns.
“Because our investment universe is so broad, we can also consider ESG profiles that have little impact on the portfolio’s return potential – for an investor base with ESG requirements,” said Aghassi.
AQR says its new fund will build on “proven investment themes with proprietary research and leverage a wide range of data sets and methodologies, including machine learning and other optimization techniques.” The systematic firm has historically selected stocks based on factors such as value, momentum and defensiveness.
Investors who have developed strategies based on specific ESG principles, such as clean energy, have historically struggled to outperform the overall market.
James Jampel, founder of HITE Hedge Asset Management, said last year he had abandoned his bearish positions on oil stocks after deciding the strategy was no longer viable given the dynamics in energy markets.
Capital Fund Management’s CFM Quant Sustainable Absolute Return Fund, a systematic long-short equity fund based on sustainability factors, is down about 4 percent this year. Trium Capital LLP’s Climate Impact Fund, which targets 100 percent sustainable investments in its long portfolio, is up about 3 percent this year, underperforming most rivals, according to data compiled by Bloomberg.
Jampel did not respond to a request for comment. Spokesmen for Capital Fund Management and Trium declined to comment.
Overall, ESG equity funds in Europe have returned 11 percent so far this year, compared with a 15 percent gain for the MSCI World Index and a 10 percent gain for the Stoxx Europe 600 Price Index, according to data compiled by Bloomberg. In the U.S., ESG funds are up 14 percent, compared with 17 percent for the S&P 500 Index.
The world’s best-performing ESG funds tend to lean toward Big Tech, while the worst-performing ones focus on the energy transition, according to data compiled by Bloomberg.
(Adds details of AQR’s fund strategy and background information on ESG performance in the final paragraphs after the “Read more” box.)
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