A fund launched by AQR Capital Management LLC is set to demonstrate how effectively ESG principles can be integrated to achieve market-beating returns.
The quant firm, co-founded by hedge fund veteran Cliff Asness, has already attracted approximately $350 million for its Adaptive Equity Market Neutral UCITS Fund, according to Bloomberg data.
Announced last month, the fund is designed to short stocks that AQR deems to have poor environmental, social, and governance (ESG) profiles while investing in those with higher ESG scores.
“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,” said Michele Aghassi, principal and head of sustainable investing at AQR.
The debate over whether investors can enhance returns while promoting a greener and fairer world continues to divide opinions in finance and academia. It’s also a politically charged issue. In the U.S., several Republican-led states have imposed bans and penalties on firms that embrace ESG, arguing that the strategy undermines fiduciary responsibilities. In contrast, Europe is embedding ESG into its financial regulations, with the AQR fund targeting investors within the European Union.
Critics of ESG highlight the poor performance of sectors typically associated with the strategy, such as wind and solar energy. These sectors have faced challenges in recent years due to rising interest rates, which disrupted the financial rationale that had supported capital-intensive renewable projects during periods of low rates. Since the start of 2023, the S&P Global Clean Energy Index has dropped nearly 30%, while the S&P 500 has gained over 40%.
Given this environment, even dedicated ESG investors are seeking ways to mitigate risk. Aghassi notes that the AQR fund provides safeguards to ensure that investors’ ESG preferences do not compromise returns.
“Because our investment universe is so broad, we’re able to – for an investor base that has ESG requirements – also consider ESG profiles with little impact on the return potential of the portfolio,” Aghassi said.