Marshall Wace, one of Europe’s biggest hedge funds, is planning to raise $1bn for a new fund that will trade stocks based on their environmental and other ethical attributes, the latest sign that a sector known for its focus on profits sees opportunities in responsible investing.

The London-based firm, headed by founders Paul Marshall and Ian Wace, will draw on the expertise of external analysts focusing on how companies address environmental, social and governance issues. The new fund will buy stocks with strong ESG characteristics and bet against stocks with poor ratings.

The move from such a high-profile hedge fund, with a total of around $45bn in assets, indicates that ESG considerations are evolving away from a niche for specialist investors and forming a more central role in how funds assess risks or try to pick higher-performing stocks.

Marshall Wace declined to comment.

People familiar with the plans for the new fund say it will be part of Marshall Wace’s $19bn computer-driven Tops trading system, which analyses “buy” or “sell” recommendations from around 1,000 external analysts at banks or research houses to come up with trading signals.

The launch underlines how hedge funds are increasingly looking to the rise of interest in ethical investing as a way of making money. Caxton Associates and Man Group are among funds that have been hunting for reliable ways of identifying stocks with strong or improving ESG characteristics that could beat the market. Global sustainable investing assets totalled around $30tn in 2018, according to the Global Sustainable Investing Alliance.

It also comes as some of the biggest names in the $3tn hedge fund industry have been able to lure in client assets during the coronavirus crisis. Many investors are opting to put their money with large, well-known firms, many of which have made money during the crisis, rather than risk a small or new fund that may be hard to meet face-to-face because of travel restrictions. DE Shaw and Baupost are examples of big funds that have raised money quickly in recent months.

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Marshall Wace, which recently made around €150m in a couple of weeks from betting against collapsed German fintech Wirecard, will also filter out stocks in sectors such as adult entertainment, tobacco and weapons.

Tops is headed by Anthony Clake, who joined the firm directly from university in 2001 and has overseen the strategy’s growth. Analysts contributing to Tops are paid based on how well their recommendations perform, and are sifted to try to make sure those with winning bets stay in while those with poor recommendations are excluded.

The firm’s Market Neutral Tops fund has gained around 6.4 per cent in the first five months of the year, said a person who had seen the numbers. Hedge funds on average are down 5.1 per cent over that period, according to data group HFR.

laurence.fletcher@ft.com

Via Financial Times