Financial Times 05Mar2020

Thursday5 March 2020 ★ FINANCIAL TIMES 19

MARKETS & INVESTING

L AU R E N C E F L E TC H E R

Bets on lower interest rates have
fuelled profits for hedge fund manag-
ers includingAndrew Law’sCaxton
Associates nd former Moore Capitala
whizzGreg Coffey n a chaotic periodi
for markets.

Mr Law’s London-based Caxton, one of
the world’s oldest and best-known
funds, has gained more than 3 per cent
in its main Global fund since the start of
last week, taking returns this year to 7
percent.
A portfolio run solely by Mr Law also
profitedandisup8percentthisyear.
MrCoffeymadea5.2percentgainlast
month at New York-basedKirkoswald
Capital Partners, the hedge fund that he
started in 2018 aftercoming out of
retirement, said two people who had
seenthefund’sperformancefigures.
Like a number of macro traders —
fund managers who bet on moves in
bonds, currencies and stocks — both Mr
Law and Mr Coffey have been wagering
onrisingpricesforbonds.
Such assets have been lifted in antici-
pation of further easing of monetary
policy by central banks to combat the

economic damage caused by the coro-

navirus and as investors have sought

havens from the stock market rout of

thepastweek.

Yields on two-year Treasuries have

slumped from 1.35 per cent going into

last week to 0.83 per cent as of Monday

and they dropped briefly below 0.75 per

cent following the US Federal Reserve’s

surprise 0.5 percentage point cutin

interest rates n Tuesday. Yields fallo

whenpricesrise.

Yields on the 10-year US Treasury

note, meanwhile, have dropped from

1.47 per cent going into last week to a

lowof1.02percentonTuesday.

“With recessionaryfears n the air,i

funds that own bonds have done well,”

said Amin Rajan, chief executive of con-

sultancy CREATE-Research. Equity

funds, however, “are having a torrid

time”.

The gains take returns for Mr Coffey,

who manages close to $2bn in assets, to

morethan6percentthisyear.Lastyear,

hepostedreturnsof28percent.

Funds that bet on volatility have also

gained. TheVix index— known as the

stock market’s “fear gauge” — rose from

17.1 percentage points going into last

weektonearly50atonestagelastweek.

During the course of that week, the

S&P 500 dropped 11.5 per cent,

although it has recovered around 2 per

centsofarthisweek.

Greenwich, Connecticut-basedOne

River Asset Management osted a 17.2p

per cent gain in its Long Volatility fund

last week, taking this year’s gains to

around 14.5 per cent. Its computer-

driven Dynamic Convexity fund made

7.8 per cent last week, taking this year’s

gainsto8.2percent.

Asset management

Hedge funds Caxton and Kirkoswald

profit from bets on lower interest rates

R O B E RT S M I T H A N D CY N T H I A O ’M U R C H U

LO N D O N

H2O Asset Management’s auditor has

flagged that the firm broke rules gov-

erning open-ended funds by engaging

in large trades with a small brokerage

linked tofinancierLars Windhorst.

The London-based investment firm, a

subsidiary of French bankNatixis, saw

clientswithdraw €8bn om its fundsfr

last summer after the Financial Times

detailed he scale of its illiquid bondt

holdingslinkedtotheGermanentrepre-

neur.

While H2O met all of these redemp-

tions and its chief executiveBruno

Crastes owedv never to halt ithdraw-w

als, some of its fundsblew through lim-

its o n counterparty risk when dealing

withthefallout.

This breached French rules imple-

menting Ucits, an EU-wide framework

that, among other things, allows retail

investors to withdraw money from

fundsonadailybasis.

KPMG lagged more rule breachesf

relating to one of H2O’s funds known as

Adagio,with€4.7bninassets,inanaudit

letter signed last month. One of these

violations related to “transactions with

a single counterparty” equivalent to

6.84 per cent of the fund’s net assets,

breachingalegalcapof5percent.

H2O disclosed elsewhere in the fund’s

annual report, nding September 30,e

that this counterparty wasShard Capi-

tal, a London brokerage whose founder

James Lewis as had a close workingh

relationshipwithMrWindhorst.

The transactions were “buy and sell

back” trades involving bonds linked to

Mr Windhorst, according to the report.

H2O disclosed that Adagio had €314m

of these reverse repo trades with Shard

outstanding at the end of September,

classing them as “efficient portfolio

managementtechniques”.

Separately, KPMG flagged that a posi-

tion in a series of bonds called Chain

FinancebreachedUcitslimitsonowner-

ship. Mr Windhorst raised this€500m

bond n 2017, when he was looking toi

settle a lawsuit linked to theformer

energyministerofRussia ndfightingtoa

regain ownership of his main invest-

mentcompany.

“It is disconcerting in our view that

such irregularities were still occurring

some three months after the illiquid

Windhorst debt exposures first came to

light,” said Matthew Clark, an equity

analyst at Mediobanca, who has an

“underperform”ratingonNatixis.

H2O said that the breaches had since

been fixed and that “all counterparty

risks are duly complied with”.It said it

had disposed of some Chain Finance

bondsinDecember.

An FTinvestigation n Novemberi

revealed that Shard Capitalseems to

have playedan important role in keep-

ingMrWindhorst’sinterestsalive.

“Shard Capital does not comment on

any clients or transactions,” saidthe

firm, adding thatit is an “institutional

broking business, it acts under instruc-

tionasanexecution-onlybroker.”

H2O saidit “transacts with counter-

parties that are duly registered by regu-

lators and approved by the company’s

riskcommittee”.

Asset management

H2O’s auditor flags rule breaches in

trades with Windhorst-linked broker

H2O said the breaches had

since been fixed and that

‘all counterparty risks are

duly complied with’

Greg Coffey made a 5.2 per cent gain

last month in turbulent markets

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B I L LY N AU M A N— N E W YO R K

ESG ratings are becoming embedded in
financial markets. A growing number of
investmentindiceshingeoncompanies’
rankings for environmental, social and
governance criteria — and some banks
are even offering better borrowing
terms to companies with strong ESG
scores.
But these are not like credit ratings,
which areregulated, and tend to be
governed by specific triggers such as a
company breaching a certain threshold
of leverage. And with so many different
methodologies on the market from a
growing number f providers, there cano
bea spreadofviewsononecompany.
Facebook,forexample,wasdocked ot
a rating of 21 out of 100 last year byS&P
Global, which worried about its privacy
andtransparencystandards.
YetMSCI’s rating for the social media
platform has hovered in the “average”
range, fluctuating between double B
andtripleB.
ESG ratings are becoming “increas-
ingly important but the level of public
scrutiny and supervision of them... is
far from optimal,” said Steven Maijoor,
chair of the European Securities and
Markets Authority, at an event last
month.

How do ratings firms go about the

scoring process?

The first step is often determining what
factorsarematerialtothecompanythat
theratingagencyislookingat.
Sustainalytics, one of the most promi-

nent ESG ratings providers, has set out

138 “sub-industry” groups and desig-

nates “exposure scores” for each factor

within each sector, according to Simon

McMahon,headofESGresearch.

For example, mining companies may

be more vulnerable to the physical

effects of climate change than the tech

sector, so those risks are weighted more

heavilyintheminers’ratings.

Ratings are reviewed annually and

updated to incorporate new risks as

theypopup.

“It’s a combination of a data-driven

process and a process that incorporates

analystinsight,”saidMrMcMahon.

Paris-basedVigeo Eiris, one of the

world’s oldest ESG rating agencies now

owned y Moody’s, has identified 38 so-b

calledsustainabilitydriversandsetsout

a weighting for each across 40 different

industries.

JetBlue, an airline thatsigned a loan

tied to its Vigeo Eiris ESG score, was

rated on about two dozen drivers rele-

vant toits sector, said Benjamin Cliquet,

the agency’sheadofESG-linkedloans.

Vigeo Eiris also updates itsassess-

ments frequently. But in casessuch as

JetBlue, where it is important to be able

to compare year-on-year data to set the

terms of its loan, the agency will pro-

ducereportsconsistentwiththeoriginal

methodology so that BNP Paribas, the

bank providing the loan, can make an

apples-to-applescomparison.

How does a rater find the data it

needs?

One of the biggest challenges in ESG

ratings came from self-reported data,

saidRemyBriand,headofESGatMSCI.

For starters, many companies offered

data only on metrics where they per-

formedwell,hesaid.

On top of that, the data was typically

unaudited. “You have to look for evi-

dence elsewhere to make sure compa-

nies are doing what they’re saying,” said

Mr Briand,adding MSCI spent a lot of

time looking at other datasuch as regu-

latory fines or product recalls to vet

whattheyreceivedfromcompanies.

This has paid off in casessuch as

Equifax, the consumer credit agency

that revealed abreach f its systems ino

September 2017. MSCI’s ESG team had

downgraded he company to triple Ct

morethanayearearlier.

“Privacy and security [carried] a big

weight in that sector and we scanned

[databases] and saw they already had a

poor record of being hacked and not

doing anything about it,”Mr Briand

said.

Sustainalytics’ research is also based

on a combination of self-reported data

andexternalverification.

If a matter was eemed material,d

Sustainalytics would scoreit whether or

not the company provided information,

said Mr McMahon. “We have identified

therisk.There’saneedforthatrisktobe

managed.”

How will this work out?

Baer Pettit, president of MSCI, expected

some convergence between scores from

different providers but he did not

believeESG ratings would ever achieve

the homogeneityofcreditratings.

This will provide little consolation for

investors looking for quick and easy

ways to put a sustainability stamp of

approvalontheirportfolios.

Butproviders argue that a certain

level of variance is a good thing and

shows that ESG analysis can be used by

investorstogainaninformationaledge.

Mr Pettit compared the market with

analysts’ ratings of listed companies

where there tended to be arange of

views. “We are making a forward look-

ing judgment with a variety of inputs,

notallofwhicharestandardised.”

“Turning unstructured data into

actionable insights is hard to do,” added

Mr McMahon. “That’s why there’s an

opportunity.”

Additional reporting by Anna Gross

Growing use of ESG criteria

by companies draws scrutiny

of methodology employed

‘The level

of public

scrutiny and

supervision

of [ESG

ratings] is

far from

optimal’

JetBlue signed a

loan with BNP

Paribas linked

to the airline’s

ESG score

Mike Blake/Reuters

Asset management. ompany standardsC

Flows into ethical funds raise

questions over ratings

B E N JA M I N PA R K I N— M U M B A I

India’s top court has overturned a ban

onbanksdealingwithcryptocurrencies,

providing vital relief to an industry

that had been pushed to the brink of

extinction.

The country’s central bank in April

2018 issuedan order barring inancialf

institutions from doing business with

anyoneinvolvedincryptocurrencies.

The Reserve Bank of India’s move

severely curtailed trading activity and

prompted the closure of some of India’s

largestvirtualcurrencyexchanges.

Before the ban, it is estimated as

many as 5m Indians traded cryptocur-

rencies across about two dozen

exchanges.

Governments around the world have

grappledwithhowtorespondtotherise

of digital currencies such as bitcoin but

New Delhi’s efforts to restrict the trade

have been amongthe harshest, along-

sidethoseofChinaandIndonesia.

The Supreme Court’s decision yester-

day to quash the ban on the grounds

that it was disproportionate has opened

the door to a revival in cryptocurrency

trading. The RBI did not immediately

commentonthecourt’sdecision.

Striking that ban essentially opens“

up the financial institutions to be open

to crypto,” said Jayanth Kolla, founder

of tech and telecom consultancy Con-

vergence Catalyst. “It’s setting a huge

precedent because India is a big

economyandabigcountry.”

He added that cryptocurrency enthu-

siasts“areallecstatic”withthedecision.

Mr Kolla said the ruling could have

global significance at a time when

cryptocurrency advocates in other

countries push for more favourable reg-

ulation.

But India’s nascent sector still faces

considerable obstacles. A government

committee has separately proposed an

outright ban that could see anyone

caught in possession of digital currency

beingimprisonedforupto10years.

The proposals, which emerged last

year,havenotadvanced.

Authorities in India including the

central bank have raised concerns that

virtual currencies are difficult to

regulate and leave users vulnerable to

fraud, pointing to a $300m bitcoin scam

in2018.

They say the anonymous nature of

thecurrenciesmeanstheycouldbeused

for illicit purposes such as terrorist

financing.

But t he Internet and Mobile Associa-

tion of India, an industry group that

challenged the RBI’s order, insisted that

regulatorshadoverreacted.

Crypto enthusiasts said opposition

stems in part from the government

treating cryptocurrencies as money and

thereforeasathreattotheIndianrupee.

Crypto asset

Indian court

overturns

banking ban

on digital

currencies

‘Striking the ban is setting

a huge precedent because

India is a big economy

and a big country’

Companies with some of the biggest discrepancies

in ESG ratings

Median rating from five rating agencies

Source: MIT Sloan School of Management

Sustainalytics RobecoSAM Asset KLD Vigeo Median rating

Banco Santander

BT Group

Samsung Electronics

Caterpillar

ITV

L’Oréal

Tyson Foods

Google

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MARCH 5 2020 Section:Markets Time: 3/20204/ - 17:58 User:stephen.smith Page Name:MARKETS1, Part,Page,Edition:EUR , 19, 1