At the annual Cayman Alternative Investment Summit in February many high profile speakers discussed the future shape of the funds industry. ESG and technology topics dominated discussions this year. Cayman Funds reports.
The increasing importance of environmental, social and corporate governance (ESG) factors is creating challenges for investment managers and funds as they try to find the right balance between seeking returns and this commitment.
That was at the heart of discussions at the Cayman Alternative Investment Summit (CAIS20), which took place in the Cayman Islands in early February, with multiple sessions dedicated to the topic, although the conversation spilled over into networking and lunchtime sessions.
One session, called Fast and Furious: Accelerating ESG into Alternative Investments, chaired by Leanna Orr, deputy editor of Institutional Investor, summarised the issue.
The chair noted that studies show that hedge fund managers are more serious about ESG now than they were a year ago.
“When you have the right conversations, the right planning and decision come to the forefront.” Kareen Stangherlin, Zelos Capital
“This is because investors are forcing this agenda,” Orr said.
“For a long time, the topic was regarded as interesting, but no-one read articles on ESG,” she said. “That has changed in the past six to nine months.”
Large fund managers such as BlackRock, which is divesting some $1.8 trillion of its actively managed funds from coal-focused companies, are playing an important role, she said.
Barbara Ann Bernard, founder and CIO of Wincrest Capital, said that, despite the recent increase in interest in ESG among investors, this has actually been a long time coming. Some of the early thinking about the theme started some 35 years ago, she noted.
“This has not happened overnight, it has been 35 years in the making,” Bernard said. “Back then, they were taking about stakeholder capitalism; of course the shareholder matters but companies also have a moral obligation to ensure things are sustainable for the supply chain and their employees and society as a whole.”
Bernard added that 85 percent of the value of the S&P index is now made up by intangible assets such as brand, trust, loyalty and sustainability.
“There has never been a riskier time to run a company unsustainably,” she said: some 80 percent of insolvencies are attributed to poor corporate governance, she added.
Asha Mehta, director of responsible investing at Acadian Asset Management, said the perception of ESG has changed in the past 12 months, with investors now pushing for it to be expressed in investment mandates. Investors are increasingly trying to quantify ESG, she noted.
She argued that the demand side is only one part of the explanation for this. “There is a new generation of millennials who have different priorities, and the rise of women into more senior positions is also making a difference,” Mehta said.
Anna-Marie Wascher, CEO of Flat World Partners, agreed that investors are more interested in ESG than ever, and about the importance of data and research in driving investor perceptions of certain investments.
“I would say the biggest opportunity is in terms of alpha generation for those who can truly understand and interpret the data,” she said.
Kareen Stangherlin, CEO of Zelos Capital, argued that ESG is increasingly expected to be part of fiduciary responsibility. “There has been a mindset that an analysis of ESG is consistent with fiduciary duty,” she said.
“Our duty is to the corporation and all stakeholders, not just shareholders. My view is that, if you get the governance right, then the decisions about environmental and social issues will be dealt with as part of a sustainable business plan.
“When you have the right conversations, the right planning and decision come to the forefront of things. It makes for good long-term planning and a sustainable business,” she said.
Technology the game-changer
Another big strand of the event was around technology, including the potential of using big data and how the advancement of robotics, combined with artificial intelligence (AI), could revolutionise many aspects of the economy—but also lead to challenges for society.
In a session called Investing at the Intersection of Technology, chaired by Claire Griffin, director, KPMG, the panellists described how robotics and AI will revolutionise certain sectors.
Steve Toebes, chief robotics officer at HDS Global, suggested that e-commerce groceries will become a $1 trillion industry. Although this is a very fast-growing space, it is highly competitive, he noted, with many of the major players losing a lot of money. The biggest reason for this, he suggested, is a lack of efficiency in their systems.
HDS Global has developed so-called smart warehouses to change this for its customers. It has developed advanced robotics to cover every aspect of the warehouse requirements around picking and selecting food items, which is combined with AI to create the optimum way of doing things.
“There remain real hurdles to leveraging that data effectively in a business context.” Caroline Sherman, Quantopian
“We picture the warehouse as a whole system, each aspect of it complementing the other parts and with all tasks being done to maximum efficiency through the use of AI,” said Toebes.
“Having a human involved in the process can cause problems, since humans can never keep pace with robots. It is a question of creating the right system where they work together and complement each other for maximum efficiency.”
He noted that company’s new technology fits well with the principles of ESG, an increasingly important requirement for many investors. He said this is a new trend in the sector but one which will have a big influence of the development of technology and how it is used.
“I have been in robotics for more than 19 years and in the past year I have been blown away by how many investors have been asking about our ESG plan,” Toebes said.
“There are many things we already do but the fundamentals of our technology also fit well with this. We are looking at building vertical farms on top of our warehouses, supplying fresh produce on site. There are so many exciting things ahead for this technology.”
Yaro Tenzer, co-founder, Righthand Robotics, explained how the technology his company has developed has the potential to revolutionise the challenges of order fulfilment for retailers. It has developed a very sophisticated robot capable of picking and placing items with accuracy and dexterity while also constantly learning how to do it better.
“It’s all about efficiency for our customers,” Tenzer said. “Their warehouses are struggling to fulfil demand but they are starting to combine the data with robotics in a way that is revolutionising
Data drives investment
In a different session, Christina Qi, founding partner at Domeyard, said many companies end up investing money and resources in technology without fully grasping what they are trying to achieve.
“FOMO—fear of missing out—is a big thing in this sector,” she said. “You get a CEO saying ‘the business needs to do something in this space’ and they go and hire a bunch of smart people and tell them to make something happen.
“But with no direction or strategy, that never works out. It is like anything else, whether it is crypto or ESG—it would be irresponsible to do anything just for the sake of it with no purpose or strategy behind it.”
Running a hedge fund, Qi said she is regularly pitched to by startups looking to sell datasets they claim are valuable, but which are often of poor quality. She always asks: “Why are you selling it if it is that valuable?”
The transition from raw data to extrapolating true value is rarely easy or fast, she stressed.
Caroline Sherman, managing director at Quantopian, agreed that every firm understands the need to be better at using data, especially in the context of so much new data being created every day in every sphere of life.
“We know that 90 percent of data has been created in the past two years—this is an incredible time to be working with data,” she said.
The volume of data can be overwhelming, Sherman added.
“People are hiring people like data scientists who seem to have the relevant skills but there remain real hurdles to leveraging that data effectively in a business context. How do you clean it and look at it intelligently and get to the point you are turning that information into intellectual property for your firm?”
Jessica Stauth, managing director of Fidelity Labs, said companies often pursue innovation for the sake of it, rather than for a tangible business goal. She said three things are needed for a positive outcome: good data, talent, and use cases.
Finally, Mark Jackson, scientific lead of business development at Cambridge Quantum Computing, discussed the advances that have been made in quantum technology and their implications for the world of business. Quantum computing will become increasingly important in the future, he said, advising the investment sector to keep track of developments, especially around cybersecurity.
Crypto a hot topic again
The conference also contained a fair bit of content around the use and potential of cryptocurrencies. One speaker told delegates that bitcoin “will do for money what the internet did for information”, and while it could fail, it is more likely to become a globally accepted form of “digital gold” that is fundamental to the financial system long-term.
That was the message from Wences Casares, founder and CEO of Xapo, a digital banking alternative with millions of users globally. He explained how, growing up in Argentina, he saw his parents’ life savings wiped out three times through no fault of their own but due to economic crashes or government policy.
When the internet emerged, Casares said, he hoped that would help fix this—but that has not happened. Most people globally still do not have access to safe and secure banking, he noted.
Bitcoin can change this, he said. “When I saw bitcoin for the first time I was very sceptical—but I now believe this will do for money what the internet did for information,” he said. “I have now dedicated my career to helping this succeed.”
He predicted bitcoin will become a global meta currency – a global, non-political standard of value in the same way that the world has global standards of measurement or weight. “Bitcoin will become a digital version of gold,” he said.
Despite its challenges, bitcoin has grown and evolved to a remarkable extent over the past decade, he argued, with the number of users and transactions continuing to grow exponentially. If it survives another 10 years it will be around for many more hundreds of years, he said.
“It continued to grow even with challenges and when many people saw it as irrelevant. If it continues to grow in the next 10 years, I would see that as a victory,” Casares said.
“Something with that level of ambition takes a long time to mature—it is an oak tree. I may want an oak to grow faster—but that is my problem, not the oak’s problem. I think the most incredible part of its evolution has already happened.”
Casares stressed that the key to bitcoin’s long-term value is that it is what he called “a sovereign system”—it obeys no rules other than its own and cannot be manipulated or changed by anyone, including governments.
He argued it is unhelpful to try and convince people of bitcoin’s value and potential. Instead, individuals should take some time out to educate themselves on its potential, he recommended.
“I do not want to impose this on the world but, as an observer of the world, it seems likely we will have a form of digital gold in the future and that will change the world more than the internet,” he said.
“My advice would be to invest time in understanding it and invest an amount of capital that you can afford to lose. If I am correct, it could change your life.”
Diversify in the search for alpha
Along with ESG, the wider issue of diversity was a prominent theme at CAIS 20, with the focus on how greater diversity can make for better returns.
Despite the fact that many studies show that funds with more cognitive diversity among the decision-makers perform better, women remain underrepresented in the funds industry—and that must change.
That was the message from Barbara Ann Bernard, founder and CIO of Wincrest Capital, speaking at the Cayman Alternative Investment Summit (CAIS20).
Evidence shows that funds with such diversity at a decision-making level perform better, yet women control only 1.3 percent of assets under management, she noted.
“Despite their performance, women do not get the opportunity to scale up,” she said. “That is a tragedy, but I am hopeful this will change and we will see more diversity in the industry as we also seek alpha.”
Bernard added that although quotas are not an ideal way to improve diversity in the industry, they do work.
Anna-Marie Wascher, CEO of Flat World Partners, advised companies to think more about diversity in all aspects of their business, from their recruitment policies to conducting a gender pay gap analysis. “They need to get out of the comfort zone,” she said.
Asha Mehta, director of responsible investing at Acadian Asset Management, said the industry should see achieving cognitive diversity as a key goal, driven by data and rationale. “We can use this data in much smarter ways; there is so much data available now that it is a question of how smartly and ethically to use it in the investment process,” she said.
Cayman Alternative Investment Summit, Wences Casares, Xapo, Barbara Ann Bernard, Wincrest Capital, Anna-Marie Wascher, Flat World Partners, Asha Mehta