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Alternative Market Briefing

New hedge fund aligns high-quality businesses with ESG factors

Tuesday, August 10, 2021

Daniel Butler
B. G., Opalesque Geneva for New Managers:

A new manager located near Boston has just launched a long/short ESG hedge fund with a strong focus on company business models and innovation, combined with ESG factors - following the belief that it is a myth that one must sacrifice returns to invest alongside their values.

Blue Swan Investors LP (not to be confused with Blue Swan Capital) was founded in 2021 by Dan Butler, Rob Reilly, and TJ Villano, a team of investment professionals and friends with over 20 years of investment experience each. Blue Swan went live on July 1st with its flagship Blue Swan Sustainable Impact Fund.

Daniel Butler, CEO and CIO, will be presenting at the next Small Managers Big Alpha webinar on 7th September. He previously worked at Champlain Investment Partners and Principal Global Investors before becoming a private investor in 2016.

"Evidence has shown that both quality and ESG factors are strong alpha generators in their own right but, we believe, taken together, they provide an even more powerful combination," he says.

The Fund is a long/short ESG hedge fund with a concentrated portfolio of about 50 names, covering all caps on the global scale.

The long and the short sides

On the long side, the managers invest in companies with superior business models with high environmental, social, and governance (ESG) scores. On the short side, they bet against companies that are poor business models with low and/or downward trending ESG scores.

"On the long side, we see opportunities in software, semiconductors, semi-capital equipment, life science tools, FinTech, financial exchanges, and essential data providers. The common thread running across our long holdings is that they are high quality, high ESG, and provide mission-critical products that should do better than most companies in any market environment," Butler explains to Opalesque.

"On the short side, we will continue to follow our playbook of targeting lumbering, large-cap, no-growth, liquid companies with a dash of tactical shorts in the mix."

The fund is a long term holder with an average holding period of 3-5 years on the long side, and on the short side, it is much more tactical in nature and the holding period is typically less than a year.

An example of a long investment is Taiwan Semiconductor (TSM). It is the leading semiconductor manufacturer in the world. "IN recent years, they have come from behind to not only catch Intel but definitely pass them on a leading-edge semiconductor technology processes, so much so that Intel recently threw in the towel and decided to outsource advanced chip production to TSM." The company also clearly passes Blue Swan's ESG screen.

An example of a short investment is Boeing. "The root cause of the issues at Boeing is management becoming distracted from building airplanes in a virtually impenetrable duopoly market with a multi-decade growth runway in front of them and instead focusing on beating quarterly forecasts."

Investment steps

Blue Swan's "mission aligned" investment process includes six steps:

1. Core beliefs - "We focus the bulk of our efforts on sectors/industries that are aligned with our core beliefs of superior business models and positive ESG impacts," Butler says. "We believe that innovation drives human progress and innovation accelerates in times of crisis. We also believe that while the financial landscape is constantly evolving, human nature doesn't change."
2. ESG and company fundamental screen
3. Valuation and position sizing
4. Company level analysis, which is where they begin a deep analysis of each company.
5. Technical Analysis
6. Trading execution: "It is an under-appreciated source of incremental alpha. We have significant in-house trading expertise with founding partner Rob Reilly (CMT, Certified Market Technician)."

A separate account of the strategy run by Butler returned 102% in 2020.

Good timing

The timing is right for such a strategy as hedge funds have only recently started to incorporate ESG and impact considerations into the decision-making process, reports Yahoo. According to financial services company Morningstar, investors poured close to $21bn into ESG-focused hedge funds in 2019, representing a 400% year-on-year increase.

A survey late last year by BNP Paribas, a bank, shows that hedge funds are approaching the tipping point of ESG integration. "Whilst the majority of funds surveyed do not currently integrate ESG, most of those who do only started integrating ESG since 2018. On this trajectory, by mid-2022 the majority of hedge funds will be integrating ESG approaches - likely sooner."

The involvement of hedge funds in ESG and impact investing is important as they tend to be movers and shakers. An example is Engine No. 1, a small San Francisco-based hedge fund, which recently won three board seats at Exxon Mobile Corporation.


Next Small Manager Big Alpha webinar:

With larger quantities of capital chasing the same alpha strategies and continuing to erode alpha, savvy investors are turning to smaller or emerging managers as they look for alternative sources of return. In the third episode of this ground-breaking webinar series, we present four managers:

- Salman Baig, Unigestion
- Aylon Morley, SAVA Investment Management
- Theron de Ris, Eschler Asset Management
- Daniel Butler, Blue Swan Investors

When: Tuesday, September 7th 2021, at 10:30 am ET
Free registration here: www.opalesque.com/webinar/

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