Bridgewater Associates, one of the most prominent macro hedge funds, is reflecting the integration of sustainability in its research process with two senior appointments.
Bridgewater, a systematic top-down macro investor across asset classes with AUM of $150bn (€123bn), has appointed Carsten Stendevad, former CEO of the Danish labour market pension fund ATP, and Karen Karniol-Tambour, the long-time head of investment research, as co-chief investment officers for sustainability.
The appointments recognise the sustainability research that the firm has been doing for a number of years. Indeed, Bridgewater says that sustainability is now so embedded in all aspects of the economy that it has become a core component of any serious economic analysis.
Stendevad told IPE: “Understanding environmental and climate change is a priority for us. We recognise that it’s one of the most important challenges of our generation and we know that addressing it will require significant shifts in the overall underpinnings of the global economy.”
As Karniol-Tambour put it in an online conference at the end of 2020: “You can’t look at the world and try to predict the future and not think about these issues.”
Bridgewater’s research library includes papers on climate change and inequality.
One paper from May 2020 examines scenarios for the impact of climate change on economies (spoiler alert: the impact on emerging economies’ GDP growth is estimated to be considerable if CO2 emissions continue on their current trajectory).
Stendevad says: “One of the important things as you think about transition risk is actually that regulation and the impact of regulation is the thing that’s going to hit us as investors much earlier than the actual risks themselves.”
The aim is to develop “a very keen understanding of how climate-related policies will flow through fiscal policy, monetary policy, ultimately into the various markets”.
Commodities are a perfect example of how policy is expected to affect demand cycles, whether in hydrocarbons or industrial metals needed for innovative climate technologies.
Although hedge funds may be perceived as something of a final frontier for ESG, many have been incorporating sustainability into their investment processes for some time.
In a report from last October, BNP Paribas found that 40% of a sample of 53 hedge funds with AUM of over €500bn, include ESG analysis in their investments to some degree.
BNP also identified barriers to ESG’s further integration, such as the difficulty in analysis and incorporation of social factors.
Stendevad points to Bridgewater’s research from 2019 and 2020 on social issues, including a paper from last September titled ‘Social conditions are an increasing consideration for how the economy will be managed’.
The paper states that “social conditions will have rising impacts on markets as policy evolves to more explicitly consider such issues in evaluating its goals. After a decade of money printing and with rates at zero, fiscal policy is likely to be at least as impactful as monetary policy in the decade to come.”
As Stendevad explains: “If you think about what this means for social cohesion, populism, conflict, and how policymakers are taking that into account, both on the fiscal and monetary side, you have to understand those things.”
Bridgewater has started applying sustainability directly to its investment strategies – the All Weather risk-parity strategy, the flagship Pure Alpha hedge fund and the Optimal Portfolio, which combines alpha and beta.
Bridgewater pioneered the risk parity concept 25 years ago with the launch of the All Weather strategy. Bridgewater’s founder, Ray Dalio, initially conceived of the strategy for a family trust, and later opened it to clients.
In simple terms, the strategy risk-adjusts assets across four groups of asset classes that perform in different macro environments.
The risk of a portfolio with 60% in equities is dominated by the equity risk; switch the asset allocation around and a 60% fixed-income portfolio would be more secure, but with a lower return. Applying leverage balances the risk contributions of different asset classes – from equities to commodities to credit to nominal and inflation-linked bonds.
Stendevad said: “The question we asked ourselves was, would it be possible to create a strategic asset allocation that is designed to deliver strong risk-adjusted returns through different economic environments – so in other words, strong financial performance – and is only composed of securities that are aligned with the UN SDGs?
“That’s a pretty high bar for sustainability applied to the entire portfolio, to each asset class, and to each security. That was the objective. You can try to answer the question conceptually but what we set out to do was not just the fundamental research, but to build out a fully systematic sustainability process as an integrated part of our investment system.”
For Bridgewater, sustainability is a third dimension alongside risk and return – this is not about adding ESG as a standalone factor to sit alongside the other risk and asset components of a multi-asset portfolio.
Bridgewater’s partnership with Lyxor has been in place for some years, with the Pure Alpha Major Markets strategy on the French firm’s managed account platform. A second strategy, the Core Global Macro fund launched in 2019, provides access to the firm’s long-standing alpha and beta investment strategies in one vehicle.
The UCITS framework for the new All Weather strategy is slated for launch in this month or next. Regulatory clearance has been received, IPE understands, and the two firms are pitching to clients and collecting capital commitments.
Florence Barjou, CIO of Lyxor, told IPE that the process involves “taking the Bridgewater investment philosophy, putting it in a long-only framework and applying ESG selection criteria to that framework”.
The appeal of top-down, multi-asset portfolios ebbs and flows and there are perpetual concerns that risk-parity does not perform well in rising-rate environments.
This is countered to some extent by the answer that inflationary drivers of rising rates can be compensated by inflation assets in the portfolio.
Ultimately, the re-emergence of inflation and the spectre of rising rates – together with growing interest in ESG and the UN SDGs – are strong tailwinds for a risk-parity fund that is fluent in the languages of macro risk and sustainability-related portfolio impacts.