GENEVA (HedgeWorld.com)—Fund of funds provider Harcourt Investment Consulting on Nov. 1 plans to launch what it says is the first socially responsible investing-compliant fund of funds for hedge fund investors. The new fund, which has yet to be named, is being launched in conjunction with Folksam, a Swedish insurance group that has provided seeding for the venture.
Carina Lundberg Markow, head of corporate governance at Folksam, presented the new fund idea to attendees at a Harcourt breakfast held in Geneva earlier this month. Her firm has some 4.5 million clients in Sweden, and holds assets of around 20 billion euro ($27.9 billion). Harcourt manages around $5.1 billion in a variety of fund of funds products for primarily institutional investors. The new product is being developed as a response to a number of client requests.
Paul Anderlind, a Stockholm, Sweden-based managing partner at Harcourt, noted that while in a very short time investments in SRI-type funds have ballooned to $4 trillion, none of the products developed to date addresses the needs of fund of hedge fund investors "This is the first SRI fund of funds to be developed for hedge fund investors," he told HedgeWorld. "It will be aimed at principally institutional investors, but we believe it will also gain support from high-net-worth investors."
Harcourt and Folksam will both benefit from teaming up for this project. Folksam was looking to create a vehicle that would allow the firm to invest in hedge funds, and it gains access to Harcourt's experience in fund of hedge funds development and management. Harcourt, meanwhile, will look to leverage Folksam's more than 10 years' experience in the field of SRI.At launch, the fund will invest in between 10 and 12 managers who will be sourced from Harcourt's universe of approved managers and candidate managers. These managers will be required to abide by an SRI policy that has been drawn up by Folksam. Strategies using equities or corporate bonds will be run over managed accounts, and there will be regular monitoring of these portfolios to ensure their adherence to the established SRI policy.
Harcourt has so far identified candidate funds in long/short equity, statistical arbitrage, merger arbitrage, currency CTA, fixed-income arbitrage, emerging market debt, asset-backed securities and directional sovereign debt that are willing to join the initiative. Strategies that make direct investments in companies—either equities or debt—will be subject to the regular monitoring of their portfolios.
With respect to direct investments, the Folksam SRI team will work with an independent SRI screening company. The screening process uses the MSCI World Index as its base universe and removes companies with certain types of exposure. Disallowed are investments and derivatives exposure, long or short, in firms that contravene U.N. conventions on Human rights, the environment or corruption, or those engaged in the arms, alcohol, gaming or tobacco industries. Also excluded are investments in financial futures linked to fossil fuels such as oil, gas and coal.
However, investments in "best-in-class" companies are accepted in the utilities and energy sectors. Thus, an investment would be acceptable in, for example, a power plant that produces a lot of emissions but that can demonstrate a commitment to containing and offsetting its externalities. The current investable SRI-compliant universe numbers approximately 1,500 companies.
One might conclude that this be taken a step further by hedge funds—that is to say, a hedge fund could invest in the best SRI performers (provided there were good fundamental reasons for doing so) and short the poorest performers with, say, the largest environmental impact and hence the greatest regulatory risk. Not so fast, said Mr. Anderlind. "We're not using funds that are shorting poor SRI performers," he said. The underlying funds will simply have to avoid poor SRI performers—period.
"Folksam has an excellent name in SRI issues. Folksam and Harcourt will jointly look to convince other hedge funds to improve their SRI performance," said Mr. Anderlind. "They are also helping to market the fund to other institutional investors. The more assets we can raise, the more hedge funds will see value in compliance to SRI principles." Mr. Anderlind added that interest in the new fund "has been very strong, although we haven't done any formal marketing yet."
Mr. Anderlind said a number of meetings had already been set up where Harcourt and Folksam will present the product to other institutions. He said he believes public and private pension funds could be fertile areas for the new fund, as could endowments, foundations and religious investment groups, which are beginning to gain importance in the SRI area.
The new fund, which will be domiciled in Luxembourg, targets returns of LIBOR (the London Interbank Offered Rate) plus 300 basis points. For the institutional share class, the minimum investment is $10 million, and there is an annual management fee of 1% and a performance fee of 5% for returns over the benchmark. For the regular share class, the minimum investment is $500,000, and there is an annual management fee of 1.5% and a performance fee of 10% over benchmark.
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