News & Initiatives

This latest Hedgeweek Insight Report starts with the immediate aftermath of the FTX collapse, and focuses primarily, on the more enduring effects. These include the heightened counterparty risk for managers, the loss of confidence among investors, and the influence on lawmakers, on both sides of the Atlantic, as they take their first steps towards creating a framework for cryptocurrency regulation.

Damage limitation

Writing for clients in November 2022, Albourne Partners’ Travis Williamson, Head of Hedge Fund Investment Due Diligence, and Steven D’Mello, Partner, Senior Operational Due Diligence Analyst, said that a confluence of factors had limited the damage from counterparty exposure to FTX for some managers as:

• “FTX did not pass every manager’s counterparty due diligence framework, given the opaque nature of the relationship between FTX and its hedge fund, Alameda Research, and the lack of robust financial reporting and policies. Additionally, managers may not have needed to use the type of leverage that the FTX platform facilitated.
• FTX.com was challenging for some US-based fund managers to access (FTX.com vs FTX.us). FTX. com offered derivatives and was not CFTC registered. For managers that did not have offshore traders or offshore entities, it was difficult to access the FTX.com platform.
• FTX.us did not offer derivatives and allowed withdrawals for a longer period of time than FTX.com did, allowing some of those managers to reduce that exposure as events unfolded.
• Many managers reduce their exposure to exchanges as much as possible by sweeping assets off the exchanges into segregated trust accounts.
• There was relatively limited forced selling, as a large portion of the highly speculative investments in digital assets had been washed out after the collapse of Terra Luna earlier in the year.
• That being said, investors should be wary of clawback risk emanating from the FTX bankruptcy proceedings that may have the result of increasing exposure to FTX beyond numbers reported by fund managers.”

Please click on this link to access the full report.

By Travis Williamson and Steven D’Mello 
Albourne Partners

Following the collapse of FTX, counterparty due diligence has become even more crucial for all active trading strategies. Managers have been trying to find suitable counterparties, while accessing enough liquidity to reasonably execute their strategy.

In the long run, we may see regulatory pressure that forces separation of execution, custody, and financing in digital asset markets to mitigate systemic counterparty risks. 

However, an early interim solution that is emerging to help manage counterparty risk is the increasing usage of off-exchange settlement which permits trading without pre-funding transactions on exchange by using leverage provided by the custodian, with settlement occurring on a daily basis. 

Mitigating Risks Going Forward:

• Avoiding usage of centralized counterparties through trading over the counter (OTC): While there is settlement risk, OTC is wallet to wallet with no ongoing counterparty risk. Triparty OTC is likely to be sought by certain managers to reduce settlement risk. DeFi is also peer-to-peer and wallet to wallet, but regulatory solutions are needed to enable institutions to confidently access it. Decentralized protocols are still subject to substantial security risks (i.e., hacks). Therefore, more maturation of the smart contract security process is required before we see institutions substantially use decentralized exchanges.
• Potentially, there could be a shift towards centralized exchanges that offer more transparency. Proof of reserves involve having the exchange identify its wallets to verify that the exchange has sufficient assets to meet its liabilities. However, proof of reserves may lack granularity on the liabilities side of the balance sheet. Therefore, currently, there is no better alternative than audited financial statements. A combination of proof of reserves and audited financial statements would provide more transparency into counterparty health than currently present.
• Increasing usage of off-exchange settlement, trading on a T+0 or T+1 basis helps mitigate some of the risk.
• Reducing counterparty risk by sweeping assets off exchange into segregated trust accounts and by diversifying exposure across multiple counterparties may also be prudent.

Please click on this link for the full article.

Sizable swathes of the hedge fund industry have been left battered and bruised by 2022’s market turmoil. Managers across a range of strategies are nursing losses and capital outflows as the year draws to a close, while headlines suggest the appetite for less liquid alternatives – such as private equity and debt – continues to outweigh that of hedge funds among many allocator groups. And yet investors continue to show faith in hedge funds, as the findings of this latest Hedgeweek Insights report illustrate.

Travis Williamson, Partner and Head of Hedge Fund Investment Due Diligence, at Albourne Partners, says investors are looking for assets that are correlated with inflation, have return streams unrelated to economic activity, and that provide a hedge to the higher market volatility that inflation creates. “Hedge funds are a particularly helpful asset class when thinking about the latter, as they are relatively liquid. Elsewhere we see continued focus on real assets, due to its inflation linked return profile.”

Q&A:

What are some of the major trends among private wealth investors when it comes to hedge fund allocation in 2023, particularly when compared to interest in other alts?

Travis Williamson: “The appetite for alternative investments among the HNW group continues to grow. Many sophisticated investors are looking for ways to diversify, particularly following a period where some historically sound allocation frameworks have been challenged.”

What are some of the issues keeping hedge fund allocators up at night?

Travis Williamson: “Many issues and trends are strategy specific, but the overall trend of hedge funds becoming less liquid, from an LP perspective, is a significant trend. Hedge fund managers have become more dynamic in the pricing and liquidity profile of their offerings, and given the capacity constraints faced in many strategies, hedge fund managers are introducing more pass-through fee structures with reduced investor liquidity. This trend began in the large players within multi-strategy space and has permutated the industry.”

Please click on this link to access the full report.

The spectre of trapped capital has heightened the desire for efficiency, according to a panel discussion during ILS Bermuda’s Convergence conference.

There are various ways to manage capital efficiently and thus calm the nerves of an investor in insurance-linked securities (ILS). According to Michael Hamer, partner and senior analyst at Albourne, this topic has become a focus for investors because, over the last four or five years, substantial amounts of invested capital has become ‘trapped.’

As moderator of the panel “Reduce, reuse, recycle” at ILS Bermuda’s Convergence conference, Hamer began with a positive message.

“A number of managers and service providers have been very active in trying to develop ways of making the investments more efficient. One of the areas that in particular has really grown quite rapidly is providing investors with a significant amount of non-recourse leverage through the use of rate and balance sheets, and tail hedges,” Hamer said.

For the full article please click here.

Open Protocol data provides a window into how managers across the Hedge Fund strategies have responded to the macro-economic and geopolitical turbulence that has characterized 2022. Below, we have highlighted some key insights from the latest strategy-level data. Clients can contact their Client Account Manager or Portfolio Analyst for more information.

Managers, at large, have maintained a cautious and defensive approach to positioning, as recessionary and inflationary woes continue to weigh on financial markets and volatility.

Directional strategies have all turned to a net short equity exposure. 

CTA net exposures are shown below.

Source: Albourne

Open Protocol data provides a window into how managers across the Hedge Fund strategies have responded to the macro-economic and geopolitical turbulence that has characterized 2022. Below, we have highlighted some key insights from the latest strategy-level data. If you want more information on these, or for other insights, please contact your Client Account Manager or Portfolio Analyst.

Directional strategies have seen their net long exposure to equities significantly reduced. CTAs have stepped into June with a flat net exposure, while Global Asset Allocation and Global Macro, have – in aggregate – shifted to an overall net short positioning in the asset class. All three strategies have been keeping sizeable shorts in sovereign interest rates (SIR) throughout 2022.  

^{Source: Albourne}

Equity Long / Short strategies have also been reducing their net long exposure to equities. Overall net long exposure across strategies has moved to multi-year lows. Open Protocol data is also showing that US Long / Short managers, are building short positions in heavily impacted sectors such as Consumer Discretionary, and Real Estate.

Source: Albourne

Following an extraordinary couple of years for global markets, financial regulators have kick-started a range of initiatives after large swathes of proposals and reviews were put on hold during the Covid-19 pandemic. This latest Hedgeweek Insight Report examines in detail the gathering momentum of regulatory change post-pandemic and its potential impact on the hedge fund industry on both sides of the Atlantic - from the Securities and Exchange Commission’s far-reaching private fund adviser proposals to the EU’s wide-ranging reviews of AIFMD and MiFID/R. The report also reflects on the ways in which broader economic and political developments - spanning ESG and sustainable investing, cryptocurrencies, and Brexit – are potentially reshaping the future investment and compliance landscape for hedge fund managers.

The volatility and high inflation rates experienced so far in 2022 have made it difficult for investors to specify certain regulation demands. “Historically, public and private pension plans have been most attentive to regulatory oversight; however today there is no overwhelming consensus to increase the current level of regulation,” notes Adrian Sales, head of operational due diligence and partner at Albourne.

Read the full article here. 

As the hedge fund industry continues to grow and evolve, and some established firms take a step back or convert into family offices, the fortunes of the next generation of managers are coming into sharp focus. Many larger hedge funds may have weathered the storms of recent years, but start-ups face an ever-expanding array of hurdles. In this latest Hedgeweek Insight Report, we explore how early-stage managers have fared. The insights within are drawn from a Hedgeweek survey of 55 emerging and established hedge fund managers, a series of in-depth interviews with industry participants, and further background research.

Travis Williamson, head of hedge fund investment due diligence and partner at Albourne, argues that emerging managers can also offer investors alternative benefits. “Emerging managers are often sought for diversification, not just within the overall portfolio, but within the alternative sleeve of a portfolio. The immediate question is: what does this emerging manager bring to my portfolio to warrant taking the start-up risk? Often, start-up managers have brought novel approaches to ESG and implementation to the investment process,” he explains. He adds that Albourne’s clients are increasingly demanding diversity and inclusion, ESG and protocol questionnaires, all pointing to a desire for mission-based investing as well as increased transparency.

For the full report, please click here.

For a summary of the report, see this Hedgeweek article.

Albourne Announcements, New Partners, and Equity Recipients

Albourne’s aspirations have always been multi-generational, and this has driven our approach to both equity participation and succession. It is with regard to the latter that we announce that:

Albourne’s co-founder, Guy Ingram, will be stepping down from his Executive Committee (EC) role, but will remain in his capacity as Chief Economist.

When the company started, Guy’s work product was “the promise” and we hope that the work product of today’s Albourne is a reflection of his work ethic. Beyond even his conscientiousness, however, is his conscience: this implied promise, much like the admiration of his colleagues for him, is entirely and utterly timeless.

Filling the seat in Guy Ingram’s stead, is Anita Kouzapa. Anita joined Albourne in 2000 and has been Head of the Cyprus office since 2018. In the 4 years that Anita headed the Cyprus office almost doubled in size, further consolidating its mission critical role within the company. For more on Anita’s journey at Albourne over the last 21 years, please see the following short clip!

In 2016, we introduced Alternates (deputies) to several key decision makers within the firm. This time last year, Anita assumed the Alternate role for Guy on the EC and as noted above is now taking her position on the EC. Anita will also serve as acting COO, transitioning her Head of Cyprus position to her Alternate, Sofia Vishnumolakala. Sofia (Head of IDD in Cyprus) has been at Albourne for over 18 years, starting her career at Albourne as a Research Analyst.

Jane Hughes, Head of Europe, is retiring this year. We will miss her dearly and wish her the very best in her next chapter of life. Jane’s contribution to Albourne over the last 14 years has been remarkable. Kellie Hata (Head of European Private Credit) who joined in 2010, has been the Regions’ Alternate Head since 2017 is Jane’s successor.

In Asia, Richard Johnston, current regional head, is transitioning to Chairman for the region, having founded our Asian business 17 years ago and grown the world class team in Hong Kong, Singapore, Tokyo, and Seoul to 40. Richard’s Alternate Debra Ng, who opened our Singapore office and leads the Portfolio group in the region, will formally assume Richard’s day-to-day business operational responsibilities, as the new Head of Albourne Asia.

Meet the New Partners

We are also delighted to announce 5 new Partners, 7 existing Partners who have become Equity Option partners, plus 12 additional Equity Option Recipients. 

More than a quarter of the largest US hedge fund managers have the capacity to trade digital assets, With Intelligence can reveal.

Research on regulatory filings show that 28 out of the top 100 US-based Billion Dollar Club Managers are mandated to trade digital assets. So far trading in the space has been exploratory in nature though market participants tell With Intelligence that interest from the traditional hedge fund segment is growing.

Albourne’s D’Mello expects traditional hedge fund firms will continue to embrace cryptocurrency trading. “Our belief is that digital assets will continue to proliferate, not only amongst crypto HF managers but also across traditional hedge fund mandates that will increasingly express investment themes through usage of digital assets.”

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The full article can be accessed from With Intelligence here.

Albourne¹ submitted to the US Securities and Exchange Commission (“SEC”) its views on the SEC’s Private Fund Proposed Reforms announced in February 2022.²   

Please see the following link for the full response. 

We believe Albourne is uniquely placed within the industry to comment on potential unintended consequences and the broader impact of the proposals given our team’s coverage of many critical areas impacted including investment strategy, operations, portfolio management, reporting and private funds’ terms review.

The SEC’s proposed reforms include sweeping changes that could materially impact the private funds industry.³ Albourne understands the concerns faced by investors as well as the challenges fund advisers will face to implement the proposals. The spirit of the proposals is to address many activities that have negatively impacted investors in the past. This could be due to inherent conflicts of the GP, a lack of transparency to investors or other factors.

Albourne is generally supportive of many of the proposals but also notes certain proposals and options outlined by the SEC could have unintended consequences. Given the length of the proposal and the number of questions asked by the SEC, Albourne did not attempt to cover all of them; instead Albourne has looked to highlight five key proposals and provide insight on some of the questions posed by the regulator.

The five key proposals covered are: 

1. Quarterly statements
2. Mandatory private fund adviser audits
3. Adviser-led Secondaries
4. Prohibited activities 
5. Preferential treatment  

With the SEC’s public comment period closed, Albourne expects changes to be made to the final proposed rules.

The final proposal will likely push managers into a more institutional framework. While further progress is needed in the private markets space despite noticeable improvements since Dodd Frank, the downside with such proposals tend to be additional administrative burdens for smaller managers that will need to comply with the SEC’s new reporting requirements. This can increase costs, which in turn could be passed onto investors or reduce competitiveness by increasing the barriers to entry.

Albourne will continue to monitor changes to the proposal and assess how they impact the industry once they become finalized.

__________________

¹ “Albourne” and “we” refer to the group of companies comprising Albourne Partners Limited and its subsidiaries.

² SEC announcement and proposal documentation is available for download at: https://www.sec.gov/news/press-release/2022-19

³ The SEC defines Private Funds as both Public and Private Market funds

Albourne is delighted to have won Hedge Fund Consultant of the Year at Institutional Investor's 19th annual Hedge Fund Industry Awards!

Thank you for your votes! 

For details of all of the winners, please click here.

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The winners of the 2022 Institutional Investor's Hedge Fund Industry Awards were selected by majority vote through an online survey of the readership of Institutional Investor (“II”), which consist of participants in the hedge fund industry globally. There was an open (public) nomination process. The editorial team verified nominations. The nominations were made public and a voting process for the awards, including “Hedge Fund Consultant of the Year” (the “Award”) was opened. Voting for this award was open to investment fund managers. All investment consultants located in North America, Europe and Asia that advise institutional investors on hedge fund investments were eligible to receive the Award under the same survey criteria. The survey was not structured, administered or designed to produce a pre-determined result of Albourne winning the Award. In conferring the Award to Albourne, II attributed survey nominations for any one of Albourne’s affiliates as a nomination for Albourne.

Albourne is not affiliated with II and did not pay a fee to be eligible to be nominated for the Award. The Award is not representative of an Albourne client’s experience. The Award reflects the subjective views of investment fund managers, and not those of Albourne’s own clients. The Award is not indicative of Albourne’s current or future performance.

The Alternative Investment Management Association ("AIMA"), together with leading digital asset custodians and industry experts (including Albourne), has published a new Industry Guide on Digital Asset Custody for institutional investors. The guide provides industry guidance on sound practices and key considerations around due diligence for institutional investors determining how to custody their digital assets. This jurisdiction-neutral guide has been primarily designed for institutional investors who are seeking the services of a digital asset custodian.

It is the initiative of AIMA’s Digital Assets Working Group ("AIMA DAWG") – a cross section of around 300 senior industry experts including institutional investors, custodians, exchanges and other service providers. It is tasked with driving AIMA’s regulatory engagement, thought-leadership initiatives, and operational guidance in the area of digital assets.

The concept of digital asset custody revolves around the safekeeping of a private key. However, as the private keys are used to store, manage, and transfer digital assets by the owner and help with the decryption of messages and authentication of transactions, they represent a single point of failure in the system. Therefore, private keys require sophisticated technologies to prevent theft, loss or destruction. It is the control and management of these private keys which have given rise to the frameworks supporting the custody of digital assets as a distinct and specialist service offering.

While keeping a private key safe is fundamentally a technical need entailing specific hygiene protocols, when embedded within a commercial service offering, potential users of that service need to consider the terms upon which the service offering is provided, the regulatory framework sitting around the custody provider, any insurance provisions that are required or are in place and the legal basis upon which the assets are held.

As a general resource, the guide should not be regarded as a substitute for professional advice, which should still be obtained where appropriate. Further, institutions engaging in digital asset custody should pay close attention to applicable regulatory requirements and guidelines issued by regulatory authorities in applicable jurisdictions.

For the full paper please click here.

The Standards Board for Alternative Investments (SBAI), an active alliance of institutional investors and alternative asset managers, announced today the launch of its Global Regulatory Committee. The Committee brings together leading institutional investors, asset managers and investment consultants to enhance and support the SBAI’s dialogue with regulators around the world. Chris Bowlin, Sr. Compliance Counsel, Teacher Retirement System of Texas has been appointed Chair of the Committee, and Stephen Berger, Managing Director, Citadel, has been appointed Deputy Chair.

Chris Bowlin said: “I am honored to chair the SBAI’s Global Regulatory Committee, which will help the SBAI further develop its balanced perspective on regulatory topics, taking account of manager and institutional investor considerations.”

The SBAI Regulatory Committee will start work immediately and help formulate the SBAI’s responses to the US SEC's recent requests for public comments on its Proposals for Private Funds, Securities Lending, as well as Short Positions and Short Activity Reporting.

Members of the Committee include:

• Gaurav Amin, Head of Fintech & Implementation, Albourne Partners
• Arthur Bengasino, Portfolio Manager, TelstraSuper
• Stephen Berger, Managing Director, Global Head of Government & Regulatory Policy, Citadel; Committee Deputy Chair
• Hans Bergström, Compliance Officer, AP7
• Chris Bowlin, Sr. Compliance Counsel, Teacher Retirement System of Texas; Committee Chair
• Luana DiCandia, Director & Senior Legal Counsel, Ontario Teachers’ Pension Plan
• Jason Eng, General Counsel and Chief Compliance Officer, Dymon Asia Capital
• Kimberly Hamm, Director, Global Public Policy Group, BlackRock
• David Lau, Chief Compliance Officer, Springs Capital Brigid Rentoul, General Counsel, Winton Group
• Merel Uittenbogaard, Senior Legal Counsel, Regulatory Team, APG Asset Management
• Karl Wachter, General Counsel, Magnetar Capital
• Glen Zwicker, Managing Director, Head of Investment Operations, Howard Hughes Medical Institute

Mario Therrien, Head of Investment Funds and External Management, CDPQ, and Chair of the SBAI said: “We see regulators increasingly turn to the Standards and the SBAI’s work more broadly, as they continue to take notice of the practical solutions the SBAI provides to some of the complex issues the industry faces. We are thrilled to have the members of this Committee support our efforts.”

Since its inception, the SBAI, an Affiliate Member of the International Organization of Securities Commissions (IOSCO), has engaged proactively on a wide range of regulatory topics, including regulation for alternative investment managers, financial stability, short selling and ESG.

Thomas Deinet, Executive Director, SBAI, said: “We look forward to working with the Committee to provide constructive input into the global regulatory process, supporting efforts to facilitate fair and efficient markets, reduce systemic risk, and help investors make well-informed investment decisions.”

As the investment management industry strives to adapt to the increasing momentum of Sustainable Investing, the speed with which ESG-related acronyms appear to be emerging may be disconcerting to many. To help navigate the maze of acronyms, this paper presents a typology of acronyms of organizations or initiatives that aim to contribute to the Sustainable Investing space.

• UN-Related Organizations and Initiatives - Several of these initiatives have been originated by the United Nations, which, given the organization’s mission, is seen as a first mover in the Sustainability space. 
• Investment Industry Organizations and Collaborations - These have also responded to investor interest in ESG, either by leveraging the existing membership groups or by forming new collaborations with specific objectives. 
• Sustainability Reporting Organizations and Initiatives - Several organizations have been formed to establish standards for sustainability reporting, an area of historical inconsistency in terms of format, depth, and quality of information presented. 
• Climate-Related Organizations and Initiatives - There are also organizations that specifically aim to tackle climate change, although in varying ways. Some may focus on advocacy, others on reporting, while some focus on carbon measurement. 
• Impact-Related Organizations and Tools - Lastly, several organizations aim to establish best practices and create investor tools for impact investing.

A non-exhaustive list acronyms falling within these categories are listed in Table 1 below. Please refer to the Glossary at the end for an expansion of the acronyms and links to the organizations and initiatives. 

Table 1 - Typology of Acronyms

Subsequent whitepapers will aim to provide more in-depth discussion on the relevance and application of the various frameworks and tools that have been created by the organizations noted in this paper. 

GLOSSARY

UN-Related Organizations and Initiatives

• PRI: Principles for Responsible Investment
• UN SDGs: UN Sustainable Development Goals
• UNGC: UN Global Compact
• UNDP’s SDG Impact: United Nations Development Programme’s Sustainable Development Goals Impact
• UNEPFI: United Nations Environment Programme Finance Initiative
• NZAOA: UN-convened Net Zero Asset Owner Alliance

Investment Industry Organizations and Collaborations

• ILPA: Institutional Limited Partners Association
• AIMA: Alternative Investment Management Association
• SBAI: Standards Board for Alternative Investments
• CFA Institute: Chartered Financial Analyst Institute  
• The Investor Forum: UK investor collective on stewardship
• ICGN: International Corporate Governance Network 
• ICSWG and ICSWG (US): Investment Consultants Sustainability Working Group European and US Chapter
• ESG Data Convergence Project: GPs and LPs collective
• Diversity Project: Membership organization that initiated the Asset Owner Diversity Charter  
• RIA (Canada): Responsible Investment Association (Canada)
• RIAA: Responsible Investment Association Australasia 
• GRESB: Global ESG Benchmark for Real Assets

Sustainability Reporting Organizations and Initiatives

• GRI: Global Reporting Initiative  
• SASB: Sustainability Accounting Standards Board 
• IIRC: International Integrated Reporting Council
• VRF: Value Reporting Foundation
• IFRS Foundation: International Financial Reporting Standards Foundation
• ISSB: International Sustainability Standards Board
• WEF-IBC Initiative: World Economic Forum - International Business Council Initiative

Climate-Related Organizations and Initiatives

• TCFD: Task Force for Climate-Related Financial Disclosures  
• COP26: 26th Conference of the Parties
• SBTi: Science Based Targets initiative 
• CDP: Climate Disclosure Project
• CDSB: Climate Disclosure Standards Board
• GHG Protocol: Greenhouse Gases Protocol
• IIGCC: Institutional Investors Group on Climate Change
• IGCC: Investor Group on Climate Change (Australia)
• AIGCC: Asia Investor Group on Climate Change
• Ceres Investor Network: North American investor group on climate change 
• NZAMI: Net Zero Asset Managers Initiative
• iCI: Initiative Climat International  
• ShareAction: Key proponent of Investor Decarbonization Initiative
• PCAF: Partnership for Carbon Accounting Financials
• WBCSD: World Business Council for Sustainable Development

Impact-Related Organizations and Tools

• IMP: Impact Management Project
• GIIN: Global Impact Investing Network
• IRIS+: Impact Reporting and Investing Standards+
• OPIM: Operating Principles for Impact Management
• B Lab: Beneficial Lab
• III: Impact Investing Institute
• PFP: Pensions for Purpose
• IWA: Impact Weighted Accounts
• SROI: Social Return on Investment
• Nesta: UK innovation think-tank  

Jennifer Kizilbash Galang - April 2022

What is Impact Investing?

Today, Impact investing is considered to include the pursuit of financial returns at market rates from investments that deliver real world change (or “Impact”), or the pursuit of sound financial investments with positive externalities. This type of Impact Investing, known as “Non-concessionary Impact” Investing, is on the opportunities side of the Sustainable (or “Responsible”, or “ESG”) Investing equation. This contrasts with the more traditional view that Impact investing is “Concessionary” and involves investing for social benefit at the expense of financial outcomes, a view perhaps explained by the origins of Impact in the Social Responsible Investing (“SRI”) movement of previous decades.

Whether or not an Impact investment programme is Non-concessionary or Concessionary depends on the intentions of the investor at the point of taking the decision to invest.  If their minimum acceptable rate of return is driven only by financial risk, i.e., it is same as for a non-Impact investment of similar financial characteristics, then it is Non-concessionary. If, on the other hand, they would apply a lower return hurdle in order to secure their Impact objectives, then it becomes Concessionary. This ex-ante designation is independent of the financial outcome realised and cannot be reinterpreted ex-post:

• A Non-concessionary Impact investment that yields poor financial returns does not become a Concessionary Impact investment; it remains a poor investment, perhaps a potential “lessons-learned” case study; and
• Conversely, a Concessionary Impact investment that yields higher than expected, market rates of financial returns does not become Non-concessionary.

The Global Impact Investing Network (“GIIN”), a global champion of impact investing, defines Impact as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”¹.

Article 9 of the EU’s Sustainable Finance Disclosure Regulations refers to “a financial product [that] has sustainable investments as its objective”², and anecdotally, this seems to be widely accepted as capturing Impact Funds.

Realising outcomes, or, extracting the essence

The path to realisation of the financial outcomes of an investment is well-established and almost obvious. Consider an Impact investment that achieves a sound financial return as well as its Impact Objectives.  The sale or redemption of the investments will be accompanied by the investors’ receipt of realisation proceeds; they’ll “see” the money in their bank account.  However, this does not, by itself, enable them to participate in or receive or consume the Impact benefit of their investment.  

The investors’ participation in the Impact outcomes may be necessary for reasons of accountability: they may have represented to a Board or other stakeholders that the investment had a dual purpose, and mere receipt of expected redemption proceeds does not allow them to confirm attainment of the second, Impact-related objective.  The participation may simply comprise the quite legitimate outcome of a feeling of satisfaction that their investment has delivered the real world change they desired.  It may also be much more serious than that: the Impact Objective may be a major strategic objective for the Investor, e.g., the pursuit of Net Zero. 

For an investor to realise the Impact objective from investing in an Impact Fund, the GP of the Fund would need to first identify the potential for Impact and determine appropriate Key Performance Indicators (“KPIs”) to capture this prior to each investment. These KPIs would be measured at the point of investment, then monitored and tracked throughout the life of the investment up to its realisation³, and reported, with due reliability, to the Investor.

Consider the case of two hypothetical funds, Fund P and Fund Q. They made identical investments on identical financial terms and realised the same financial outcomes.  Their investments had significant Impact in their sphere of activity.  Fund P determined, measured and monitored KPIs which it reported as Impact outcomes to investors, and Fund Q did not⁴. An Investor seeking Impact outcomes would have a rational preference for Fund P, over Fund Q. This would be because Fund P has a track record of facilitating Investors’ participation in the Impact outcomes and Fund Q does not.  In a world where investors may be seeking Impact, subsequent raises may either favour Fund P, or put competitive pressure on Fund Q to report Impact.    

The Future of Impact Reporting

The rise in awareness of Climate Change and Net Zero pledges by many asset owners is one indication of a growing demand for Impact participation by investors.  Asset owners will be seeking investments that help them achieve such real-world objectives (or Impact), and it does not seem unreasonable to expect that demand for Impact strategies (whether or not labelled or marketed as such) will increase.

Today, the SBAI, a global alliance of alternative investment managers and allocators and custodian of the Alternative Investments Standards, released a new Toolbox memo providing guidance on completing operational due diligence on crypto assets. The memo can be found in the SBAI Toolbox for Crypto Assets.

More recently the asset class has gained attention from institutional allocators and alternative asset managers and some more traditional hedge fund managers are now allocating to this asset class. Institutional allocators conduct operational due diligence (ODD) on the underlying managers and funds that they invest in, and since crypto assets operate using different infrastructure than more traditional asset classes, any ODD must take account of certain more prominent risks.

Steven D’Mello, Partner, Operational Due Diligence, Albourne Partners said: “ODD of crypto assets requires a more in-depth look into certain operational risks. The infrastructure is still in its infancy, and whilst it is becoming more institutionalised, careful attention needs to be paid. This memo from the SBAI continues its work on improving industry outcomes by providing a valuable toolkit for allocators to understand where the risks might be different from more traditional asset classes and provide guidance on the types of questions that should be asked in due diligence processes.”

For the full press release, click here.

The Co-Chairs of Open Protocol, Albourne and the Standards Board for Alternative Investments (“SBAI”) are excited to announce the 2021 Open Protocol update. The update includes a module for potential ESG risk exposure and a new tab for Digital Assets reporting. Launched in August 2011, Open Protocol is a free and publicly available exposure and risk reporting framework for Alternative Investment Funds.

Open Protocol is taking the lead in addressing the increase in investor demand for consistent and comparable data by expanding its risk reporting framework into ESG and Digital Assets. The new ESG module helps enable investors to better understand the potential ESG profile of their portfolio as a starting point for further discussion with investment managers. The new tab for Digital Assets allows investors to assess their exposure to different types of digital assets and changes in allocation over time.  The data can be aggregated across funds, thereby providing investors with an overall understanding of exposure. 

“At the SBAI, our mission is to improve industry outcomes by promoting responsible practice, partnership, and knowledge. Key to this is making the industry more transparent and efficient. We are excited to expand the Open Protocol framework in the important areas of ESG and crypto risk reporting to facilitate better investment decision making by institutional investors,” says Thomas Deinet, Executive Director of the SBAI.

The changes to the Open Protocol framework were developed in consultation with the Open Protocol Working Group, the SBAI Responsible Investment Working Group and other parties with interest in Open Protocol and Digital Assets.

“After over a decade of providing a consistent framework to enable investors in alternatives to compare ‘apples to apples’ – we are delighted to be taking risk transparency to the next level. Both ESG and Digital Assets hold their own challenges when it comes to consistency and transparency.  By incorporating them into an established framework with reporting managers representing over $2.37trn of AUM¹, we are starting the journey in pushing the boundaries on ESG and Digital Asset Reporting,” says Gaurav Amin, Albourne’s Head of Fintech and Implementation.

The new Open Protocol template can now be accessed in SBAI’s Toolbox, alongside the updated Open Protocol manual and a document highlighting all 2021 changes. Funds are expected to switch to the 2021 Open Protocol template after a 6-month implementation period.

Chief Investment Officer magazine is pleased to present its 10th annual list of the world’s most influential investment consultants and advisers.

Each year, the publication asks a varied group of chief investment officers and allocators which consultants and advisers have “done right by them” for the current markets. This year’s list compiles the names that CIOs would recommend to their peers.

Andrew McCulloch

What new qualities do you look for in a manager/service provider given the pandemic’s financial and economic impacts?

The volatility catalyzed by the onset of the pandemic served as a stark reminder for allocators and managers alike that they must embed a high degree of intellectual rigor, humility, transparency, and forethought within their investment processes. Governance structures, risk management constructs, liquidity budgets, and regional diversification were all briefly tested in March 2020 before the rebound that followed. Managers with expertise and exposure in Asia fared substantially better as their markets decoupled from the rest of the globe, and we saw stronger governance structures empower investors to play offense in strategies which drew down more severely, anticipating a recovery. Still, others found themselves “fixing their roof during a rainstorm,” triaging potential liquidity concerns and stakeholder inquiries. Despite financial conditions not deteriorating further in this crisis, reactions to pandemic-driven volatility reiterated the value of these critical qualities in portfolio success when a future storm evolves into something more severe and unforgiving.

Read the full article here.

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David Tatkow

What do you think will be the biggest innovation in your industry in the next 10 years?

The pandemic-era brought to the forefront issues of wealth disparity and racial inequality in a way that I believe will significantly influence our industry over the next 10 years. I believe that managers who acknowledge these issues, both in how they build their portfolios, and run their businesses, demonstrate great character, which is an essential factor in building fiduciary trust. Whereas even five years ago, many investors and managers regarded ESG as a niche consideration, the events of the pandemic I believe have compelled many investors to elevate social concerns, and evaluate prospective managers in part through those same concerns.

Investors are looking at managers more closely both in terms of what companies they invest in, but also in how they manage their organization: What is the manager’s commitment to building a diverse organization, and how is this demonstrated through practices in hiring, terms of employment, and career development? I believe that the invigorated focus on ESG that the pandemic brought on will be a win-win in terms of creating a more equitable society, but also in strengthening organizations that embrace best practices.   

Read the full article here.

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Southeast Asian GPs jockey for global attention with mixed results as the largest LPs continue to hesitate to commit to the region. A trickle of investment fuels theories about how to get more.

Most recently these concerns have been compounded by a generally ineffective response to COVID-19 across the region.

There remains a sense, however, that Southeast Asian gambits in specialization and pivots to more hands-on models are merely meeting the baseline of expectations, rather than setting any of the region’s investors above the pack. These are areas of focus – tech and ESG in particular – that are not only essential to getting a commitment from global LPs; they’re essential to just getting a meeting.

“Having a technology and operational value creation focus is no longer a differentiating factor but a critical component of any PE strategy,” says David Low, Partner and Head of Asia Private Markets at Albourne.

David cites that, “in Southeast Asia, entrepreneurs may lack the experience, expertise and resources to expand regionally or globally or take their business to the next level. This is where PE managers can add the most value beyond bringing capital to the table. GPs that are able to execute this consistently and generate outsized returns will have an edge in attracting investors.”

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