Key takeaways:

• Hedge funds can absolutely be classified as Article 8 without changing their investment strategy
• Sustainability analysis and reporting need to be made for only 3 instruments: corporate & sovereign bonds, and long equities. A platform like Datia can speed up the process
• Hedge funds that do not adjust to become Article 8 might soon be completely disregarded by potential clients

Hedge funds are all about the freedom to invest in a variety of instruments and to partake in complex trading. In this context, taking sustainability into account could sound like a limitation, right?

Wrong. As a hedge fund manager, you do not have to change your investment strategy in order to take sustainability into account and even be classified as “Article 8” – a fund that promotes environmental and/or social sustainability, according to the Sustainable Finance Disclosure Regulation (SFDR).

In other words: you can have your cake and eat it too. But is it so simple?

Yes. The story of Swedish Antiloop Hedge is a perfect example. Antiloop adopted Datia as their sustainability data platform in November 2022 and told us their path to start an Article 8 multi-asset hedge fund.

The Challenge: Signing up to be an Article 8 fund before fully understanding what that would entail

When Antiloop Hedge was incorporated in 2020, the Swedish financial authorities already demanded that applications for new funds took sustainability into account. As a new player, Antiloop had no choice but to create a process for integrating sustainability into its investment decisions.

“People that have been in the industry for a long time and that have seen greenwashing among funds, are pretty tired of the ESG topic. But now we are talking about standardized formats coming from the European Union. It is actually happening and not realizing this is a big mistake,” tells Anna Svahn, CEO and Portfolio Manager, while highlighting how Article 6 funds are already losing opportunities to grow and risk becoming invisible altogether.

It took two and a half years for the fund to be up and running and, in this period, Antiloop’s team had the chance to better understand what it would mean to be an Article 8 fund. “We learned a lot in this process,” says Svahn. ‍

The first learning was: as of March 2023, SFDR only applies to three investment instruments: corporate and sovereign bonds, and long position equities. “The vast majority of assets in which hedge funds may invest are not even covered by the recent European regulations,” clarifies Svahn.‍

And the second learning was: the regulation does not force Article 8 funds to change their investment strategy. Instead, it requires funds to define a sustainability policy and communicate how they are taking sustainability into consideration. “There seems to be a general misconception about what SFDR is. When you first read it, it is a lot of information, but it boils down to creating a communication tool,” explains Svahn.‍

In February 2022, Antiloop Hedge was ready to start trading and was armed with knowledge about its responsibilities as an Article 8 fund. The remaining questions were: where would they find the data? And are there expected templates for these reports?

The solution: Finding reliable data and having everything collected in one tool

Antiloop Hedge has eight different investment strategies, spanning from the short to the long-time horizons and including assets such as foreign exchange, commodities, and derivatives. Only one of these strategies is long-term equity, composed of a mix of long and short positions. In practical terms, only the fund manager of this last strategy, Karl-Mikael Syding, is required to look at sustainability metrics.

Because this task applies to such a small portion of Antiloop’s activities, they needed to find a solution that could dramatically decrease the effort put into it. “We needed to have everything collected in one tool so we could do the ESG analysis before deciding if we wanted to invest in a company or not. But also, to be able to make the reports in a very easy way,” says Anna Svahn, CEO and Portfolio Manager.

Antiloop’s equity-focused fund manager accesses Datia to screen different companies he is considering investing in, partly relying on the available sustainability information to make a decision on security selection.

‍Moving forward: ‍‍Monthly reports? Sustainability analysis of all asset classes? Not a problem.

In November 2022, Antiloop Hedge became a signatory of the UN’s Principals for Responsible Investment. And as the new year started, they published their official sustainability policy on their website.

Antiloop is also expected to report on sustainability quarterly, but since they count on a streamlined structure in place, the plan for 2023 is to report on sustainability aspects monthly. “We are a monthly traded fund, so we figured that publishing the sustainability report together with our standard monthly report will help our investors follow up on how we are doing in all aspects,” explains Svahn. “In order to report with that frequency, having a tool like Datia is a necessity.”

Looking forward, Antiloop is not worried about the growing demands of an Article 8 fund. “I am hopeful that there will be requirements for sustainability analysis of all asset classes as the regulation evolves,” says Svahn. “If you find a reliable data partner like Datia, you will notice that complying with SFDR is not as scary as it sounds,” explains Svahn.

Solution for a Wide Range of Strategies and Asset Classes

Antiloop Hedge is one perfect example of how hedge fund managers can rely on Datia’s solution to classify their funds as Article 8 or Article 9 funds. “Antiloop Hedge is a hedge fund that, like many others, invests across various asset classes and holds both long and short positions,” says Juan Manuel Serruya, CEO and Co-founder of Datia. “We have built a flexible, yet robust platform that is capable of supporting a diverse range of investment strategies and asset classes,” he emphasizes.

Hedge funds and the broader active fund management industry face several challenges when dealing with the SFDR. In addition to the difficulty of gathering indicators for all relevant Principle Adverse Impacts (PAI) and tracking the performance of these indicators over time, fund managers are also required to perform complex reporting periodically both at the product and entity level, according to Serruya. “Acquiring a dataset is just the beginning, as significant effort is needed to integrate the data into the investment and reporting processes,” explains Serruya.

Datia offers a comprehensive and transparent dataset, along with intelligent software solutions that facilitate PAI monitoring and automate periodic reporting. This includes generating critical portfolio-level insights and producing key reports such as the PAI statement and European ESG Template (EET) files. “By leveraging automated reporting, Datia empowers its customers to save time while providing modern sustainability reporting that can attract more capital,” argues Serruya. “With our solution, customers can focus on defining their PAI considerations, knowing that our platform has all the necessary data, calculations, and reporting ready to go. This means that you can spend less time on administrative tasks and more time making better investment decisions.”

With hedge funds increasingly looking to respond to the demands of ESG-conscious investors, Datia will remain committed to helping more hedge funds incorporate sustainability considerations into their investment processes, according to Serruya. “We believe that this will not only help them access more capital but also enable them to make a more significant impact in the world of finance.”

This article features in HedgeNordic’s Nordic Hedge Fund Industry Report.