Hedge funds that can integrate environmental, social, and governance (ESG) factors could allow investors to profit from companies going in the wrong direction on climate change or governance, according to a report.
The latest Cerulli Edge – Global Edition report found a potential area of growth for hedge funds was applying quant techniques to ESG integration.
Global research and consulting firm Cerulli Associate’s associate director, European institutional research, Justina Deveikyte said: “Traditionally, hedge funds have focused on generating alpha and providing decorrelated returns, but our recent survey showed that 46% of investors believe integrating responsible investments into hedge funds will be ‘very important’ in two years’ time”.
Deveikyte noted despite the vast capabilities of machine learning, quant hedge fund managers had yet to determine how to integrate ESG factors into their investment processes and algorithms.
“AI is transforming data gathering and fund managers can now access vast amounts of information from objective sources. However, it takes considerable effort to identify material ESG signals and shift the investment process in order to accommodate ESG integration across a range of hedge funds strategies,” she said.
“Quantifiable ESG metrics are what matter. Nonetheless, hedge funds are increasingly working to develop repeatable processes that can accommodate custom ESG requirements.”
The Cerulli report noted that while artificial intelligence (AI) would be especially useful in short-term, high-frequency trading, the complexity of financial markets meant that AI would not inform long-term financial predictions just yet.