JPMorgan’s $150 Billion Unit Taps Hedge Funds for ESG Gains

(Bloomberg) — JPMorgan Chase & Co.’s $150 billion alternative asset management arm says it’s found a way to help clients make sustainable investments through hedge funds without sacrificing returns.



Customers unplug a Tesla Inc. Model 3 electric vehicle charging beneath a solar panel canopy at the Tesla Supercharger station in Kettleman City, California, U.S., on Wednesday, July 31, 2019. Electric vehicles have been adopted rapidly in California, compared to the rest of the U.S., accounting for about 44% of total sales in 2018.


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Customers unplug a Tesla Inc. Model 3 electric vehicle charging beneath a solar panel canopy at the Tesla Supercharger station in Kettleman City, California, U.S., on Wednesday, July 31, 2019. Electric vehicles have been adopted rapidly in California, compared to the rest of the U.S., accounting for about 44% of total sales in 2018.

The $118 million JPMorgan Multi-manager Sustainable Long-Short Fund has gained nearly 14% from its Feb. 18 inception to Nov. 19, twice the advance of the MSCI World Index. A Eurekahedge index tracking the performance of all hedge fund strategies rose just 3% between the end of January and October.

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The global fund is the first of its kind dedicated to environmental, social and governance issues by farming out money to several external hedge fund managers, according to Lyn Ngooi, a Singapore-based hedge fund specialist with the unit.

ESG is one of the fastest-growing trends in the investment world, with family offices joining large pension and sovereign funds in embracing the idea. ESG-focused funds drew $71 billion of new investor money between April and July alone, according to a BNP Paribas SA survey in October. Still, 60% of hedge funds didn’t integrate ESG in their investments, according to the survey.



a man standing in front of a door: A person wearing a protective mask enters JPMorgan Chase & Co. headquarters in New York, U.S., on Monday, Sept. 21, 2020. JPMorgan CEO Dimon has made the case for a broader return, saying his firm has seen "alienation" among younger workers and that an extended stretch of working from home could bring long-term economic and social damage.


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A person wearing a protective mask enters JPMorgan Chase & Co. headquarters in New York, U.S., on Monday, Sept. 21, 2020. JPMorgan CEO Dimon has made the case for a broader return, saying his firm has seen “alienation” among younger workers and that an extended stretch of working from home could bring long-term economic and social damage.

When hedge funds do embrace ESG, they typically screen out companies with bad ESG scores — weapons makers and casino operators, for example — narrowing their investing universe. There are also a small but growing number of dedicated ESG hedge funds, mostly managed out of Europe. Both risk denting returns, Ngooi said.

“To focus on these only would narrow the universe for investors and does not necessarily lead to the best stock pickers for a portfolio,” Ngooi said.

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ESG adoption is especially poor among managers with less than $10 billion of assets, a space home to many smaller, more nimble funds with the best returns, according to the BNP survey.

The JPMorgan team identified ESG themes that generate winners and losers: social empowerment, resource efficiency, technology for sustainability, health and wellness and energy transition. It then selects outside managers who are good stock pickers and are willing to run investments in separate accounts, tilting toward more sustainable themes than their existing hedge funds.

Fund Picks

After researching 125 hedge funds globally, the team at the New York-based bank allocated money to five managers, including specialists in healthcare, utilities and China. None of the firms markets itself as a dedicated ESG fund.

Ngooi declined to identify the managers and the specific stock picks, citing regulatory constraints.

For social empowerment, the fund holds a leading Chinese online and offline education provider. Within resource efficiency, it invested in a maker of drainage pipes for commercial and residential properties whose use of more reliable materials cuts leakage. China’s largest healthcare e-commerce platform is among its technology for sustainability investments, helping address the shortage of primary-care physicians.

It owns a stake in a provider of lower-cost, less invasive liquid biopsy cancer diagnosis and management solutions among its health and wellness holdings. Within the energy transition theme, it owns a stake in one of North America’s largest wind and solar energy providers that has high growth potential yet is trading at a wide discount.

Among its most profitable trades is a bullish bet on a Chinese electric vehicle maker. A bearish wager on a global biotechnology company made 40% in less than four months after the U.S. Food and Drug Administration delayed approval of a new drug it’s developing, Ngooi said.

(Updates fund, index performances in second paragraph)

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