The Principles for Responsible Investment (PRI) today announced the launch of the first industry-standard due diligence questionnaire (RI DDQ) for hedge funds to focus on responsible investments.

The DDQ is the result of lengthy collaboration between investors, investment managers, industry associations—including the Alternative Investment Management Association (AIMA)–industry consultants, and the global standard-setter for the industry, the Hedge Fund Standards Board (HFSB).

The DDQ is a tool to assist investors in their managers’ selection and assessment process. It comprises a standardised set of questions, which will make it easier to identify those fund managers who have the staff, knowledge and structure in place to incorporate Environmental, Social and Governance (ESG) factors in the investment decision-making process. Facilitating this process will result in a reduced reporting burden and an improvement of peers’ comparison, cross checking of information and data consistency across the hedge fund industry.

In 2012 the PRI published a discussion paper to raise awareness about applying responsible investment (RI) into hedge funds. Subsequently, a working group led by the PRI, with the support of asset owners, investment managers, investment consultants, the AIMA and the HFSB developed a standardised set of questions which were applicable to any hedge fund strategy and easy to access and use by all of these stakeholders. Using a combination of analysis, roundtables and interviews, the working group selected 14 questions divided into four sections:

  • Policy (identifies why an investment manager considers RI);
  • Governance (assesses who takes responsibility for the investment decisions, at what level these decisions are taken in the organisation, and if the investment manager has the capacity and governance structure to implement and oversee them);
  • Investment process (evaluates how investment decisions are made and implemented in light of RI); and
  • Monitoring & reporting (evaluates how asset owners can assess implementation, both initial and ongoing, of RI into the investment process).

The RI DDQ will be available on a number of platforms including the PRI website and through AIMA, as well as eVestment, a global institutional investment data and analytics firm.

“The future of institutional allocations to hedge funds will be in the hands of those who can innovate and deliver sustainable risk adjusted returns,” said Fiona Reynolds, managing director of the PRI. “At the PRI, we know that investors are getting pressure from their managers to include ESG criteria when choosing portfolio positions, and that many leading pension funds do not invest in hedge funds because of their lack of compliance with ESG criteria. The DDQ will be a valuable tool for helping the alternative investment market continue to move forward on responsible investment.”