AQR’s New $350 Million ESG Fund Bets the House on Winning Strategy
New York, August 2024 – AQR Capital Management LLC, one of the world’s leading quantitative investment managers, has closed raising approximately $350 million for its newly launched Adaptive Equity Market Neutral UCITS Fund. Keyed by Cliff Asness, co-founder of the firm, it was an exercise that sought out attempts to create a fund that will work in sync with ESG principles—environment, social, governance affairs—with an emphasis on outperforming the market; a bold attempt to break the balance between sustainable investing and ramming up high financial performance.
The launch timing occurs at a time when the performance of most ESG investments is realized. ESG is perceived in the conscience of many as the way forward for worthwhile investments, yet recent data shows mixed results. Some funds that have been focusing on ESG have also failed to outperform traditional benchmarks, hence it raises doubt on the ability of EGS considerations towards the persistent enhancing of the returns.
New Strategy in ESG Investing
AQR’s strategy is a market-neutral one by design; it short-sells stocks with low ESG ratings while overweighting companies with higher ESG ratings. This design will not only go after well-ranked ESG companies but also exploit well-ranked and lowly ranked characteristics.
Michele Aghassi, principal at AQR and head of the company’s sustainable investing initiative, tells me, “It’s not that we think being long any ESG characteristic and short any ESG characteristic is financially attractive on its own. It depends on which ESG characteristic.” The more fine-drawn approach determines that whilst certain ESG factors are surely critical in achieving long-term success, not all will be automatically profitable from the outset.
The Adaptive Equity Market Neutral UCITS Fund is an important example of what AQR believes—a quantitative, data-driven investment process can both help identify and harness certain ESG characteristics that contribute to returns without giving up on the necessary rigor for consistent outperformance.
Navigating MIXED ESG Results
The literature on whether ESG leads to improved financial performance is ongoing. Recent performance data is mixed. For instance, the S&P Global Clean Energy Index has tumbled almost 30% since the beginning of 2023, owing largely to the recent rise in interest rates and change in market behaviour. In comparison, the overall S&P 500 has rallied a gain of over 40% in the same period, pointing up the considerable volatility in ESG-focused subsectors like wind and solar energy.
This divergence reflects a broader challenge within the ESG investment landscape: while the principles behind ESG investing are compelling, their application in a volatile market can produce inconsistent results. That is what AQR’s new fund hopes to improve on by diversifying its exposure and remaining market-neutral so no single ESG characteristic takes over the performance of the portfolio.
ESG Investing: Contrasting Approaches in Europe and the U.S.
The environment from a regulatory perspective differs quite significantly across regions. Whereas in Europe, ESG is becoming more embedded into financial regulation, with governments encouraging better corporate transparency and accountability—the situation is very different in the US, where some states have sanctioned firms for adopting ESG strategies on grounds that such considerations often conflict with their fiduciary duties.
This creates a complex environment for global investors. AQR’s Adaptive Equity Market Neutral UCITS Fund tries to do just that—give it as broad an investment universe as possible so it can balance ESG requirements with its clients’ return potential. Aghassi says just that: “We have such a wide investment universe that we can consider ESG profiles for an investor base wanting to maintain ESG requirements but where that is likely to have little impact on the return potential of the portfolio.
The challenge of ESG performance
Despite the growth of ESG investing, fund performance lately has left a lot to be desired. This year, CFM Quant Sustainable Absolute Return Fund decreased by 4% and Trium Capital LLP’s Climate Impact fund went up by 3%, both failing in comparison to most of their indices. In Europe, equity funds investing with an ESG orientation attracted 11% so far this year, though this still lags behind the 15% jump of the MSCI World Index and 10% rise in the Stoxx Europe 600.
One of the more interesting trends within the top-performing ESG funds is a high weighting toward Big Tech, which does well anyway, combined with traditional funds focused on the greener end of the energy transition; this has taken quite a hit and shown that the marriage of goals on sustainability and financial returns is no smooth sailing.
Looking Ahead: AQR’s Wager on ESG and Market-Neutral Strategies
As AQR rolls out its Adaptive Equity Market Neutral UCITS Fund, the firm is making a calculated bet that ESG and financial returns can coexist. What AQR tries to prove is that investors do not have to choose between doing good and doing well if sustainable investment principles are mixed with a quantitative, market-neutral strategy.
In the greater context of ESG investing, AQR’s new fund will be closely watched in seeking to define a strategy that can balance considerations of ethical and financial rewards. As the landscape continues to shift, AQR’s innovation could potentially light the way for other firms attempting to reconcile sustainable investing with the demands of market performance.
(Source:- ESG NOW)