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Alternative Market Briefing

Other Voices: Responsible investing and hedge funds: The intersection of sustainability and alpha

Friday, July 08, 2022

By Nidhi Chadda, Founder and CEO of Enzo Advisors

At first glance, it may seem inconsistent to think of hedge funds as socially responsible investors, given the reputation that hedge funds have had for being the more aggressive, sophisticated investors. However, ESG investing is not only for the long-only friendly investor. There often is a misconception around what truly defines an ESG - integrated strategy and it is oftentimes mislabeled as being an impact strategy, where returns are sacrificed for impact.

ESG is the integration of environmental, social and governance factors into decision-making for both corporations and institutional investors. It is first and foremost a risk management tool, whereby hedge funds can utilize to improve their risk-adjusted returns and manage volatility. For years, investors have turned to hedge funds in pursuit of alpha and strong risk management; neither goal can be achieved without consideration of sustainability for any given business model. A long / short approach can actually help better allocate capital to those companies driving positive improvements and raise the cost of capital for other firms who are not taking the appropriate action and / or will be negatively impacted by sustainability trends. Therefore, with their razor focus on risk management and volatility, hedge funds are optimally suited for ESG integration across their portfolios.

Hedge funds are the investment vehicles best positioned to be at the intersecti......................

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