In January of 2020, Michael Arenibar founded and launched HFR Investments, LLC, a certified minority-owned investment adviser established with the vision of bringing diversity and ESG initiatives to hedge funds and HFR’s investment products.
The firm’s founding followed Arenibar’s 15 years of experience with HFR Asset Management. And the HFR name is well known in the hedge fund industry as Joseph Nicholas founded the HFR business in 1992 as Hedge Fund Research, Inc. and the HFR moniker has become synonymous with globally cited hedge fund data, research, and indices.
In this exclusive interview with Alternatives Watch, Arenibar explains how his vision has evolved with the creation of HFR’s latest business line.
Barreto: Following much of the discussion about social justice following the death of George Floyd last year, has interest in hiring diversity picked up from your vantage point in the alternative investment space?
Arenibar: The events of last summer were a wake-up call for the nation – racism and discrimination are not dead, but rather, deep-rooted issues that we must confront together. One place we can start is expanding diversity in hiring practices, especially in areas that have historically lacked diversity, which includes capital markets and the alternative space. As a firm, we’ve adopted a Diversity & Inclusion (D&I) Policy and incorporated it into our hiring practices, but we also believe that large allocators need to play a role as well, seeding and allocating to more diverse managers.
Barreto: Much of HFR Investments’ business has been focused on emerging managers and ESG in the hedge fund space. How is this business structured and what are you currently focused on?
Arenibar: HFR is a manager of hedge funds and fund of funds, and we believe that ESG adoption in the hedge fund industry, while in its nascent stages, is proliferating rapidly, particularly as institutional allocators demand it. We currently offer institutional investors a wide range of ESG options for their hedge fund portfolios, including an emerging ESG manager seeding platform, a multi-manager fund of ESG-focused managers, and custom portfolios. In a new and growing segment of the hedge fund industry, we’re in a perfect position to provide investors with access to emerging managers that are developing cutting-edge ESG strategies.
Barreto: How important is or how important should be diversity and inclusion in analyzing an asset management firm’s potential?
Arenibar: We prioritize diversity and inclusion in our analysis of asset managers because we think D&I adds tremendous value to a firm’s team, decision-making ability, and perspective. We consider a wide array of factors for all managers, but we believe that we’d be doing our investors a grave disservice if we did not consider a firm’s leadership diversity and whether or not it has policies encouraging the advancement and inclusion of minorities and women.
Barreto: Why should investors care about a fund manager’s including diversity/inclusion within its investment strategy or even within its senior management?
Arenibar: Studies show that more diverse teams are more innovative and productive, and we believe the same principle applies to investment teams and their outperformance. Investors should care about D&I not only because it’s the “right thing to do,” but also because it’s a better investment. At HFR, we’re keenly aware of this – the HFRX Women Index, an index of women-run hedge funds, has outperformed the broader HFRX Global Index every year except one since its 2007 inception, and the HFRX Diversity Index, an index of minority-run hedge funds, has outperformed the HFRX Global Index every year since its 2003 inception.
Barreto: How do you calculate success when considering the S within ESG? Do you think there has been some meaningful change when it comes to socially responsible investing over the years? If so, what do you think has driven it? S
Arenibar: Not all ESG factors are easily quantifiable, and “S” factors have lagged their “E” factors in investment incorporation specifically because they’re harder to quantify (e.g., the social impact of employee tuition support vs. metric tons of a carbon footprint). However, studies continue to demonstrate the positive financial impact of “S” factors and the real costs of neglecting them. We’re now able to quantify far more “S” factors, such as workforce diversity, workplace safety, and labor management, and I expect this trend to continue as ESG strategies develop. It’s also important to note that different factors are more material in different industries; new data will help us cut through the noise and understand what really matters from an investment perspective.
Barreto: What’s next for HFR Investments?
Arenibar: As we add more ESG hedge fund managers to our platform, we plan to develop and define our own ESG process further to incorporate a wider range of investment strategies. Each manager’s strategy, process, and portfolio are all different, and they each weigh the materiality of various ESG factors very differently – it will be an exciting and fruitful challenge to develop rigorous ESG oversight and reporting processes for each of them.