Impact investing and hedge funds - A sustainable strategy

Impact investing and hedge funds - A sustainable strategy

Impact investing is a realistic and competitive strategy for hedge funds. When it comes to hedge funds transitioning to social finance, there are four factors to keep in mind.

Impact investing and hedge funds: a win-win situation

Hedge fund managers have been hesitant to accept esg funds in India, but as the industry struggles, it may be time to reconsider how impact investing might help generate alpha. Not only will impact investments improve hedge funds' social standing, but they may also help them distinguish out from the competitors. Impact investing is a long-term investment approach that integrates environmental, social, and commercial responsibility.

Because there is no apparent leader in impact investing, early adopters may be able to gain a competitive edge. The most compelling advantage of this strategy is that an increasing number of investors want to include these investments in their portfolio.

Managers gain value not only through increasing interest in a particular fund, but also by attracting new clients and strengthening relationships with existing ones. Given the fierce competition, seizing every opportunity to demonstrate investor responsiveness while being the first to market in an untapped area is important.

Hedge funds should think about four things when it comes to impact investment

For managers interested in learning more about impact investing, as well as those who are already working in the social sector, we offer the following four considerations:

1. Defining meaningful impact metrics - For impact investment managers, the absence of standards for impact performance measures is a major barrier. Investment managers find it challenging to effectively integrate impact measures into investment decisionmaking due to the large range of impact measurement methodologies and criteria. An increasing evidence base of impact disclosure will better enable the market to evaluate

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impact investment as an investment strategy as transparency surrounding impact measurement and reporting increases.

2. Solving for intentionality, additionality, and distinction - Before actively engaging in impact investing, hedge fund managers may have a few more hoops to jump through than other types of investment managers. The following are the three distinguishing features:

Intentionality - esg funds India is distinguished from other strategies by its intentionality, which means that a portfolio manager's goal toward the positive, whether social or environmental, sets it different from other methods that may only analyze performance after the fact.

Additionality - It is a criterion for success that requires an investment to have a measurable social impact. However, there may not be any further value-add or impact for this expenditure than what already existed.

Differentiation - As the market grows, participating fund managers will want to highlight the importance of the algorithms and trading/investing philosophies that underpin impact investing.

3. Achieving comparable results - Investors will want to compare impact investing's performance to recognised benchmarks, as well as the opportunity cost of other investments not chosen. Cambridge Associates (CA) and the Global Impact Investment Network (GIIN) together created an impact investing benchmark in 2015, which evaluates the performance of 51 private projects. The preliminary results have been promising. Funds in the Impact Investing Benchmark had a 6.3 percent internal rate of return across all vintage years, compared to 8.6 percent for funds in the Comparative Universe. These preliminary findings suggest that comparable performance—or at least returns near enough to fulfill regulatory standards for foundation institutional investing—might be a legitimate expectation for impact investments.Despite the fact that hedge funds were not included in the benchmark, managers considering entering the market may find these findings encouraging.

4. Increasing demand in a tough market - The demand for impact investments may not yet be sufficient to justify the introduction of a dedicated impact strategy. Adding to the complexity, the hedge fund business has recently experienced market issues, which may have a detrimental impact on the current traction for impact investing strategies. It may only be a matter of time before demand rises, since social consciousness is on the rise in the marketplace, and millennials are demonstrating a strong interest in impact investing, with their influence growing as assets expand. If this occurs at the same time as managers utilizing impact methods to achieve equal financial returns, a new and pleasant sort of demand issue may emerge: identifying opportunities to deploy money effectively.

www.avendus.com

www.avendus.com