Cliff Asness’s AQR Adds Short-Selling Twist to ESG Investing
Cliff Asness’s AQR Adds Short-Selling Twist to ESG Investing
(Bloomberg) -- Quant powerhouse AQR Capital Management LLC is planning a new ESG-focused mutual fund that will not only favor the best-behaved companies, but also punish the worst by betting against them.
The AQR Sustainable Long-Short Equity Carbon Aware Fund (ticker QNZNX) will build a long-short portfolio of U.S. and foreign stocks based on ESG criteria, according to a Tuesday filing. The product will also pursue a “net zero” carbon positioning target, it said.
The offering appears to be the first of its kind. Historically funds targeting investments with higher environmental, social and governance standards have tended to exclude bad actors, or pursued a policy of engagement -- seeking to use shareholder power to effect change.
The new product will instead bet against the bad companies while backing the good. The idea is essentially to use the short-selling portion of the portfolio as a disciplinary tool to encourage more sustainable behavior.
It’s an approach laid out by AQR co-founder Cliff Asness in a September blog post. In his view, short selling could be pivotal to sustainable investing but is mired in confusion because it doesn’t fit neatly into ESG scoring systems.
“Using short selling to reduce carbon exposure, to get to net zero or to achieve other ESG goals, is a vital tool,” he wrote. “It’s also a tool that can readily be incorporated into portfolio construction.”
Greenwich, Connecticut-based AQR had about $25 billion in “dedicated ESG solutions” as of the middle of the year, according to the firm’s website. About $1.5 billion was in net-zero funds, Asness wrote.
While there are a number of long-short ESG funds listed in Luxembourg and Ireland, this will be the first in the U.S., according to data compiled by Bloomberg.
For the long portion, the fund will apply ESG filters to exclude companies before applying more classic AQR quantitative measures based on characteristics like value or momentum. The short part of the portfolio will seek “to express more fully the adviser’s active views.”
The carbon footprints of companies on either side of the portfolio will be netted out against each other, with the aim that exposure will equal zero or less than zero overall, the filing says.
Asness, listed as one of the portfolio managers, has a history of approaching ESG differently. In 2017, he went against the usual sales pitch by arguing that excluding bad stocks must lead to inferior performance.
By staying away from a polluter, for instance, the sustainable investor succeeds in raising its cost of capital, the flip side of which is higher returns for whoever buys the “bad” stock.
The planned fund has an effective date of Dec. 15, meaning it could launch any time after that. The total annual operating expense after waivers and reimbursements will be from 1.23% to 1.58% depending on the share class, according to the filing.
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