DECEMBER 2022

The Hedge
A look back at the month’s news, views and a little more

With regulators
increasingly
focusing in on ESG
labels, can funds
now become aforce for good?

PerformanceNews
TrendsRegulatory updates
This month, hot off the back of COP 27,
we turn to ESG with AIMA, Simmons &Simmons, Perigon and Turnkey to lookat recent developments and the move to
make the financial industry better ESG
practitioners. We also have Simmons &Simmons writing about important upcomingchanges to KIDs in Europe and UK.

A Brodie Consulting publication in
conjunction with Capricorn FundManagers and RQC Group.

#18

The Hedge
EQUITY UP, MACRO DOWN
AND CRYPTO WAY DOWN
The big story in November was the resurgenceof equity hedge funds as global equity markets,particularly the US, rallied. For the macro managers,
it was a different story, who for once this year, wereon the backfoot as the USD weakened, central banks
became more dovish, and oil markets dropped. At
the back of the field, unsurprisingly, were the crypto
managers. The HFRI Fund Weighted Composite
Index closed the month up 1.0%.
The HFRI Equity Hedge (Total) Index was up 2.7%,
led by Quantitative Directional managers up 6.0%,
followed by Fundamental Value up 3.4%. In fact, allbar one sub-strategy was up for the month, with theone outlier being Energy/ Basic Materials, down
0.7%. Most of these sub-strategies remain in firm
negative territory for the year, with only two showing
positive figures, Equity Market Neutral and Energy
Basic Materials, up 0.6% and 5.1%, respectively.
Event Driven managers were likewise largely up, with
the HFRI Event Driven (Total) Index ending themonth up 0.8%. Activists and Credit Arbitrage were
the best performing sub-strategies, up 2.8%, thenSpecial Situations, up 1.7%. Merger Arbitrage was,however, down 0.8% for the month.
Macro was a different story as these markets weighedon this space, particularly for some of the largest
managers. The HFRI Macro (Total) Index was
down 2.7% but remains up 8.2% for the year - in the
HFRI 500 Macro Index, the November figure wasdown 3.7% and up 13.0% for the year. Systematic
Diversified was the worst-performing sub-strategy,
down 5.22%, then Active Trading down 4.6%.
The HFRI Relative Value (Total) Index was up 1.1%,
with the Fixed Income Sovereign Index leading bysome distance, up 4.8%.
With so many crypto funds directly impacted by
FTX and given the drop in crypto prices, the HFRCryptocurrency Index dropped 13.5% for the month,
taking the year’s decline to 52.5%. This follows the
240% gain in 2021.
The fund of funds sector has a heavy equity bias, so
there will be few surprises that the Fund of Funds
Composite Index closed the month up 0.8%.

Upcoming Industry Events
11 January
CFC St Moritz (digital assets and blockchain)
23-24 January
Pension Bridge: Private Markets Europe 2023 (UK)30 January - 2 February
Global Alts 2023 (Miami)
Click here to see upcoming events

DECEMBER 2022

80,000 18.31bn
Number of UK traderscaught-up in FTX
bankruptcy

Soucre: FTX bankruptcy hearing

USD size of Blackstone’s
secondaries fund raise
to dateSource: Secondaries Investor

MONEY HEADS TO COMMODITIESCommodity hedge funds are once
again back in vogue after several years
in the wilderness, although the lastmonth has been a more difficult market
for these managers.

Bloomberg reports that money isflooding back to the sector, particularly
to quant traders. Funds in this space
include the $1.7 billion Quantix
Commodities Alpha Fund and the $2
billion Pimco Commodity Alpha Fund.

Using Bridge Alternatives data,
Bloomberg has written that the ‘largest
15 commodity hedge funds have posted
gains of 10.5% this year [to end October],following two years of returns above
20%.’
Macro funds are likewise chasing
many of the same opportunities andhave been rapidly expanding theircommodities teams.

SKYBRIDGE FALLS TO EARTH

The future of SkyBridge hangs bya thread. Back in September, a thirdof the business was sold to FTX.
But now, with the FTX bankruptcy,
life has become very unclear.
SkyBridge founder and CEO, Anthony
Scaramucci, has been quoted assaying that this is the worst time everfor crypto and he may well buy thebusiness back.

If Scaramucci is to repurchase thecompany, he has his work cut out, withthe unwinding of FTX and its VC arm,
Alameda, likely to take years – withmultiple jurisdictions, entities andcreditors. According to the Financial
Times, there are around 500
investments on the books (see list).

Timing is an important trait
in investing; unfortunately for
Scaramucci, he got his timing very
wrong. Over the past year, he pivoted
SkyBridge funds increasingly awayfrom their traditional markets to crypto
and when he sold the stake to FTX,
around $10 million of the $45 million
paid was invested back into the now
worthless FTT token, according toreports.

At the time, SkyBridge and FTX ties
were exceptionally close. Only a
few months ago, Fortune writes,‘Sam Bankman-Fried and Anthony
Scaramucci were fundraising together
in the Middle East.’

HIDING IN PLAIN SIGHT

The Times has opened the door toa very private yet highly successful
London fund, Quadrature Capital.

This is a London-based quant fund that
we feel we should all know - reason
being, its profits for 2021 were larger
than Marshall Wace’s - £560.5 million
in 2021 vs £481.6 million.
Based in the ‘Cheesegrater’ building,Quadrature was launched by Greg
Skinner and Suneil Setiya in 2010, bothex-DE Shaw, and today it has 98 staff.
Since 2018, the firm has not run external
investor money.

Straight from Chris Hohn’s charity
playbook, central to their approach is
the Quadrature Climate Foundation(QCF), an independent entity, which
was founded in 2019 to tackle theclimate emergency. To achieve this,QCF is looking to ‘disrupt the current
climate trajectory’ and ‘support thosethat have already or have the potential todemonstrate progress.’
Over the past year, the fund has alreadydonated a very impressive £117.3 million
to the foundation and an additional£78.5 million in previous years.

a selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
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expressed
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This newsletter
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2

The Hedge

DECEMBER 2022

NEWS (cont.)
SCULPTING A NEW PATH

Sculptor Capital Management,
the NYSE-listed multi-strategy hedge
fund manager once called Och Ziff,is looking at its next steps.
The firm’s share price has been adisaster this year, down over 55%,
and allegations are being thrownaround by the founder Dan Och
about the CEO, Jimmy Levin.
Additionally, there has been a public
dispute over Levin’s compensation,
which according to a court filing,
was a staggering $145.8 million
in 2021 (although small change
compared with Chris Hohn’s $690

million!). It is all getting very messy,
to the extent that the Financial
Times’ Robin Wigglesworth believes
that this would make for a good
episode of Succession.
The result is a ‘special committee
to explore potential transaction’ withthird parties, which will allow theunhappy shareholders - namely Och
and his crew - to exit.

CITADEL UP 32%

Citadel, the fifth largest hedge fund manager, isset for a record year, with the flagship Wellington
Fund up 32% to end of November and is now up
172% over the past five years. Citadel’s Global Fixed
Income Fund is up 28.1% this year, Citadel Tactical
Trading up 22.4% and Equities Fund up 17.8%. In
comparison, Millennium International is up 10.2%
this year and many of the big brand equities funds
down double digits.
Ken Griffin has celebrated the end of year inusual style, flying all employees from Citadel andCitadel Securities to Miami from around the world,
where they have been treated to Coldplay and
DJ Diplo, amongst others, as well as ‘three days ofcelebrations’ at Disney World, according to Reuters.

MICROSOFT #1 HOLDING
According to Goldman Sachs’s latest Hedge Fund Trend
Monitor, Microsoft (down 24% YTD) is now the mostcommonly held top stock among large hedge funds. Of the 786
hedge funds monitored by Goldman, representing $2.3 trillionof gross equity positions, 82 have this as a top ten holding.
Amazon (down 44% YTD) and Alphabet (down 30% YTD)
follow as the second and third largest holdings.

TWITTER $Last month we wrote about
funds profiting from theirinvestments in Twitter. It is now
clear from regulatory filings thatinvestors have made far morethan we initially thought. Forbes
reports that Citadel Advisors,
Millennium Management, DE
Shaw, Farallon Capital and
Third Point all had significant
positions. Carl Icahn said, “youdidn’t have to be a genius torealise [Musk] was going to finish
the deal,” a throwaway line you
can comfortably say after taking
a $240 million profit. Anothermanager, Pentwater CapitalManagement, walked awaywith a chunky $324 million
profit.

CHINA & BRIDGEWATER

Many managers have come unstuck in China overthe past few years. Even the almighty Bridgewater
Associates has found it a tough nut to crack. Looking at
the firm's 13F filings, it has seen an 11% fall in value fromits 44 US-listed Chinese equity investments during thethird quarter. Ray Dalio, however, remains a China bull.
While he acknowledges that there are ongoing problemsof Covid and debt, he was quoted at the Greenwich
Economic Forum in October as saying that the "longerterm picture in China is still bright."

CHINA FLOWS

Lock-downs, slowing growth and widespreaddemonstrations have sapped investor confidence in
China. After experiencing years of elevated investor flows,
China's private capital markets appear to have dried-up.
According to Preqin data, China-focused private capitalfundraising was $115.9 billion in 2021, compared with thisyear’s paltry $21.5 billion.

DOUBLE DOWN

Cathie Wood believes thatsome of today's discounts
are just too big to ignore. Thisaccounts for ARK Investment
Management buying morethan 315,000 shares in the
Grayscale Bitcoin Trust for
the ARK Next Generation
Internet ETF. It also comesas the $10 billion Trust sits at
an unprecedented discountof 45% relative to its value,
having sunk even lower after the
FTX bankruptcy and ongoingsecurity concerns. Year-to-date
the Trust is down around 75%,
while ARK ETF is down 60%.

This newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
month’snews, regulatory
trends, regulatory
developments
and best
practices.
opinions
those
thetheauthoronly
does
notnewsletter
constitute personal
adviseor a personal
recommendation.
We always
seek to maintaintight
editorialstandards.
If youhave
any commentson thiscontent,
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3

The Hedge

DECEMBER 2022

NEWS (cont.)
Walt Disney Co.

Third Point discloses$1bn stake

Mkt Cap: $179.8bn-32.0%

Revenue: $82.7bn
Net Income: $3.2bn% shorted: 1.1%

YTD

I year performance: -32.0%
YTD performance: -35.8%

All data sourced from Market Watch (3/12/2022)

SEARCHING FOR MAGIC DUST
The big activist story of the past month
was the return of Bob Iger as theWalt Disney CEO and downfall of theincumbent Bob Chapek.
The move to bring Iger back, who waspreviously CEO for 15 years, is firmly
aimed at appeasing some of the activist
shareholders. These include Dan Loeb’s
Third Point, which has increasingly beenturning the screw on the firm.
Disney’s share price has been
disappointing, down almost 40% thisyear, with sizeable losses coming from its

streaming services.
The latest CEO development comes justa few weeks after Nelson Peltz’s Trianbought more than $800 million in shares,
although Trian has said that Iger should
not be back in control of the company.
Earlier this year, Third Point increased
its stake in the firm and was agitating
for big changes across the firm, withthe first success being the addition ofCarolyn Everson, former Meta exec, to the
executive.

ALPHABET SOUPThe other activist story of the past month
was TCI and Alphabet. In a letter to
Sundar Pichai, Google CEO, TCI called forcosts and headcount to be cut.
With a $6 billion position in the businessand being TCI, Alphabet should take noteand shares rose 5% on this development.
This comes at a time when tech businesses
have been forced to restructure. Alphabet
in October has already announced it wasaiming to reduce hiring by more than 50%
but TCI wants more.

POWER OF INNOVATION

A new UK fund launch in November was Innovation
Investment Capital, an Alternative Investment Fundcreated to provide long-term capital to innovative
businesses within the Cardiff region. This fundis backed in the first instance by Cardiff Capital
Region, which has injected an initial £50 million, withfurther funding expected to come from co-investors.
The launch was in Cardiff at the Principality Stadiumon 15 November, with PwC sourcing and runningthe due diligence on the investments and Capricorn
Fund Managers providing the Alternative Investment
Manager structure.

David Davies, Secretary of State for Wales, launching Innovation Investment CapitalThis newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
month’snews, regulatory
trends, regulatory
developments
and best
practices.
opinions
those
thetheauthoronly
does
notnewsletter
constitute personal
adviseor a personal
recommendation.
We always
seek to maintaintight
editorialstandards.
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any commentson thiscontent,
do not hesitate
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4

Over the last two decades, low interest
rates and the tech boom have resulted insignificant growth of the venture capitalindustry. VC firms are behind some of
today’s most innovative and exciting
businesses, notably in software, biotech,energy and consumer products. To
explore the world of venture capital, we
have looked at a handful of organisations
providing critical capital to early andgrowth-stage companies.
In the first episode of our four-partseries, Simon speaks to Dame Kate
Bingham, Managing Partner of SV
Health Investors. She describes therevolutionary changes to have takenplace in medical research, which haveallowed us to move from primarily
focusing on the symptomatic treatment
of disease to targeting the underlying
pathologies. She summarises the key
challenges and opportunities in biotech,and explains what the future may look
like for the sector. She then reflects
on her time as Chair of the Vaccine
Taskforce, where she served under Boris
Johnson to co-ordinate the creation anddistribution of a vaccine for COVID-19.
In the second episode of this series,
we featured Roberto Italia, CEO of
Verlinvest, which launched in 1995 withbacking from the families behind AB
InBev. Their portfolio includes brands

such as Oatly, Tony’s Chocolonely,
Vita Coco, Pedego and Chewy.com.
In this discussion, Roberto explains
how Verlinvest helped support Oatly’s
international expansion and why they’ve
invested in the pet care and e-bike
sectors. He then shares his thoughts
on adapting to the macro challenges,
investment holding periods, exits andconsumers’ changing appetites.
In the penultimate instalment, wewelcomed one of the world’s greatest
baseball players, and now seasoned VC
investor, Alex Rodriguez (better known
as A-Rod). He played 22 seasons in
Major League Baseball and twice broke
the sport record for the most valuable
contract signed. Since retiring frombaseball in 2016, he’s focused on his
finance career as CEO of A-Rod Corp.
The firm has stakes in 30 companies,
including Snap Inc, Vita Coco, Wheels
Up and Hims & Hers, as well as a realestate portfolio. In this episode, he reflects
on both his sporting and finance career,
sharing some key case studies andlessons learnt.
We wrapped up this series with David
Haber, GP at Andreessen Horowitz(a16z), one of the world’s most highly
respected software-focused VC firms.
Before joining a16z, David was theFounder and CEO of Bond Street,www.moneymazepodcast.com

a fintech firm acquired by Goldman
Sachs in 2017. He shares with us somecase studies of their investments infintech, before describing how they
engage with firms of various sizes andhow they’re adapting to the current
macro conditions.
Established in 2020 by two financeindustry veterans, Simon Brewer and Will
Campion, the Money Maze Podcast
features some of the biggest names ininvestment management, finance &business. Through direct, entertaining
and insightful interviews with mastersof the real life money maze, it aims tohelp listeners learn about the different
approaches to allocating capital andbetter navigate the pitfalls that line thepath to prosperity. Whether you’re acurrent or aspiring investor, entrepreneur,
professional or student exploring career
options, we hope you gain some helpful
insights and enjoy the show.
To listen, search ‘Money Maze Podcast’on any major podcast app or YouTube.
You can also find out more via
www.moneymazepodcast.com.

The Hedge

DECEMBER 2022

NEWS (cont.)
BLACKSTONE CLOSING
ON $20BN FUNDCARLYLE’S PROFITS FALL
Carlyle Group released its thirdquarter results on 8 November, whichwere above Wall Street estimates, but
still saw profits fall by 47%, and theshares dropped by 7.5%. The interim
CEO, William Conway, who steppedin when former boss Lee resigned inAugust, described this environmentas "volatile".
Fundraising has been more difficult
for Carlyle than competitors, having
raised new commitments of $6
billion during the quarter, comparedwith $10 billion in the previous. The
Financial Times report that thisis 'far below the amounts gathered
by US private equity rivals,' withBlackstone raising $45 billion,
Apollo Global Management $34
billion and KKR $13 billion.
Carlyle's total assets undermanagement stand at $369 billion,
up 23% year-to-date.

Blackstone is closing in on $20 billion for its
private equity secondaries fund, Blackstone
Strategic Partners IX. This is a flagship offeringand significantly above the initial target of $13.5
billion. According to Secondaries Investor, it
has raised as much as $18.31 billion so far. This is
an impressive fund raise in a tough environment,
as Blackstone COO Jonathan Gray said: "Theoverallocation to private equity makes fundraisingmore challenging... [which] means that those same
institutions are now thinking more and more about
selling in secondaries."

SOFTBANK GOES DEFENSIVE

On 11 November, SoftBank's Vision Fund
reported losses of ¥1.02 trillion ($7.2 billion)
for the third quarter. Of these losses,
China's Sense Time was responsiblefor ¥364 billion and Doordash Inc ¥225
billion. SoftBank Group did, however, reporta net profit of ¥3.0 trillion for the same
period, compared with a loss of ¥3.1 trillion
the previous quarter. This was primarily the
result of selling part of its Alibaba Groupinvestment.

Given the current environment, founder
Masayoshi Son said that the firm is now
playing "defensive" and he will now be
taking a back seat, “delegating” CFO
Yoshimitsu Goto to take the “helm”. Son will
instead focus on “aggressively” growing
Arm Limited.
This year has actually been a reasonable
period for SoftBank, with the shares up
around 10%, having at one point been up

27%, although they are still down 40%
from their absolute peak in 2021.
SoftBank has also had an accident-prone
few years with some of its investments,
including WeWork, which lost around
90% of the $10.3 billion invested (source
Bloomberg), and most recently a $100
million loss from its FTX investment.

REAL WOES

While one Blackstone fund raises sizeable
sums another fund, the Blackstone Real
Estate Income Trust, is having liquidity
concerns and is limiting withdrawals.
This is the giant $69 billion property fund,which according to reports has only
met 43% of redemptions in November,having surpassed its quarterly redemption

limit. According to a statement sent
to the media: ‘Our business is built
on performance, not fund flows, andperformance is rock solid.’ There is a hugeamount of proprietary money in the fund,with Bloomberg reporting CEO Steve
Schwarzman and President Jon Grayeach investing $100 million.

CRYPTOWIPED OUT BY FTXIkigai Asset Management, a crypto fundlaunched in 2018, has been wiped out by
the FTX bankruptcy. With the majorityof the fund’s total assets sitting on FTX,
the business clearly cannot continue tooperate, and it joins a long list of creditors.

had got very little out when they tried towithdraw assets and now “we’re stuck
alongside everyone else.” He went on toadd, “I have publicly endorsed FTX manytimes and I am truly sorry for that. I waswrong.”As Travis Kling, founder and Chief
Investment Officer, tweeted, the firm

Another fund, Galois Capital had
exposure of around $45 million. It remains

to be seen which other crypto funds werecaught up by FTX, with Blockworks
writing that somewhere between 25% and
40% of cryptocurrency-focused hedge
funds were exposed to FTX or FTT, manyof which earlier this year were the bestperforming market funds.

This newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
month’snews, regulatory
trends, regulatory
developments
and best
practices.
opinions
those
thetheauthoronly
does
notnewsletter
constitute personal
adviseor a personal
recommendation.
We always
seek to maintaintight
editorialstandards.
If youhave
any commentson thiscontent,
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6

The Hedge

DECEMBER 2022

CRYPTO (cont.)
THE FALLOUT FROM FTXWILL TAKE A LONG TIME TO FIX
There have been plenty burnt by the
fallout from FTX. What has happened
should be the wake-up call the crypto
sector needed for greater transparency
and increased regulation.
Investors included some of the biggest
and best-known in the world. A
snapshot shows Tiger Global down
for $38 million, SoftBank $100 million,
Paradigm $278 million, Sequoia $210
million, Temasek $275 million, Ontario
Teachers $95 million and Thoma
Bravo $130 million. While ThirdPoint
Ventures, NEA, Iconiq Capital,
Millennium Management, Brevan
Howard and Altimeter CapitalManagement all participated inrecent funding rounds.
These are all investors that every fundand business dreams of getting infront of - they have the most capital to
deploy, and from their side, they havethe most demanding criteria and lay
down some of the most onerous terms.
And yet they all fell incredibly short
in FTX. What’s extraordinary is how
founder and CEO Sam Bankman-Fried
pulled the wool over their eyes andhow quickly his business unravelled
to reveal such a dud carcass of astructure that should never have cut
the mustard with any of them.
Yes, hindsight is wonderful but the
red flags were plentiful. Was it a caseof FOMO - a tulip-type mania - theneed to be in rather than out? Sequoia
even penned a 13,000-word article
on the wonders of FTX, that has been
removed from their website, and wasparticularly impressed by BankmanFriedman, who was then still in his late20s, playing League of Legends during
the negotiation process.
Bankman-Friedman should havebeen the one wowing the funds
and the bankers, yet in this case, his
charisma and vision shone throughand, instead, it was down to thesesame funds and bankers to wow him
as to why he should take their money.
These investments have all now been
written down to zero and no doubt the
responsible individuals have joined
former Twitter employees in the huntfor new roles.
According to John Ray III, the new
CEO of FTX (ex-Enron bankruptcy),
this was a “complete failure of corporate
controls [and] absence of trustworthy
financial information.” The FTX story isgoing nowhere fast, and it will continue
to be the story over the coming
months and even years.
Disentangling the business will takemore than liquidators, given themulti-jurisdictional locations of thisbusiness (see list) and the nature of
the underlying investors beyond the
big institutional players. Law 360
writes that an ‘international fight overcontrol... playing out in three jurisdictions...
will have far-reaching impacts on how
creditors might receive recoveries.’
There will be more class actions andindividual lawsuits; it is a mess.
This was a business valued at $32
billion earlier this year and is worth
next to nothing today as it unravels,and there are still around 100 affiliatedfirms, many of which have solvent
balance sheets.
With his vision, apparent rock-solid
business and ‘tech look’, BankmanFriedman epitomised ‘genius,’
mesmerising some of the best-known
and hardest-nosed investors. Thesesame investors need to take a long
hard look at their due diligenceprocesses.
Hopefully, there will be lessons learnt,
but the financial community tends
to have short-term memories. We
have seen this type before - just lookat Elizabeth Holmes and Bernie
Madoff - ultimately, there will always
be individuals selling snake oil. As
one of my old bosses said, describing
Madoff: “If they are too good to be true,
they probably are too good to be true.”

This newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
month’snews, regulatory
trends, regulatory
developments
and best
practices.
opinions
those
thetheauthoronly
does
notnewsletter
constitute personal
adviseor a personal
recommendation.
We always
seek to maintaintight
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If youhave
any commentson thiscontent,
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7

The Hedge

DECEMBER 2022

CRYPTO (cont.)
WHERE NEXT FOR VC CRYPTO CASH?

CANADIAN PAIN

For the last few years, the venture capital community has been ploughing
money into the crypto space. According to Institutional Investor, around $41
billion has been invested over the past 18 months.

Crypto has seen a fair number of casualties overthe past few months. Two of which are leading
Canadian pension funds.

It is not too hard to see why this was the direction of the money - in 2021 thesector grew by six times to $3 trillion. In May alone, there were several big fundlaunches, including a16z raising $4.5 billion for its fourth cryptocurrency fundand former a16z partner Kathryn Haun's $1.5 billion for Haun Ventures to invest
in start-up equity and tokens issued by these same start-ups.

Ontario Teachers lost $95 million in FTX andCaisse de depot et placement du Quebec $150
million in Celsius Network. Heads have or willundoubtedly roll.

With the FTX debacle and chastened investors, this is now going to be a far
tougher market to crack. Taking a line from Eyal Malinger from Beringea, atransatlantic VC firm, in the same II piece: "It was easy to raise money, but what's
going to happen with all that money... There are few places where crypto can beinteresting and add value."

ACKMAN BACKS CRYPTO

Bill Ackman is one of the few big investors in recent weeks to come out andpublicly back crypto at a time when most people are hiding or throwing mud atthe sector. According to Cryptoslate, Ackman has said that he has investments
in several crypto ventures, including DIMO, Goldfinch Finance and Origyn.
Ackman also has investments in seven VC funds and has a couple of direct
investments. In total, he says that these account for less than 2% of his assets.
Ackman believes that 'crypto has the potential to benefit society,' but it does
need "sensible regulation and oversight."

MAN LAUNCHES CRYPTO FUND

While timing is not great, Man Group has launched its first dedicated crypto
fund. This is through AHL, with Bloomberg reporting that this will be readyfor the end of the year. This has been developed by Andre Rzym, partner andportfolio manager. AHL already trades cryptocurrency futures. Unsurprisingly,
given everything that has happened in recent weeks, there was no publiccomment from Man Group on this news.

Commenting on these investments, John
Rekenthaler, vice president of research at
Morningstar, said that there are ‘serious questions
around due diligence’ and “that’s part of thejudgement call that the pension fund manager has
to make.”

CONTAGION

Ken Griffin was, until earlier this year, a prominent
critic of crypto and had long been calling out
investments in this space. In March, however, heappeared to have a change of heart and had comeround to its merits, saying he was wrong.
With everything that has been going on with
FTX, Griffin has once more reaffirmed his bearish
stance. Speaking at the Bloomberg New
Economy Forum in Singapore, Griffin said that thefallout goes beyond just crypto and "undermines
trust in financial markets."
Another vocal critic is Mark Mobius, who believes
bitcoin may well fall to $10,000 and a deep selloff in crypto is likely to drag down global stock
markets.

DISTRESSED MINING

Perhaps it is a case of flying too close to
the sun, but another pain trade in crypto
is mining. With bitcoin trading at around$16,000, it is now no longer profitable
to be mining the coin, for according tomacromicro.me, the average mining costis $19,662. This has encouraged investors
to look for distressed mining assets andtoday there are a glut of mining rigs, many ofwhich are still unused and in their boxes. The$2.5 billion Valkyrie Bitcoin Miners ETF, abenchmark for miners that invests in bitcoin
mining operations, is down around 80% sincelaunch in February. While Core Scientific Inc,the largest US-listed bitcoin miner, recently
reported losses of $435 million for the third
quarter and $1.7 billion for the year, withbankruptcy looming.

This newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
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expressed
areexpressed
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notnewsletter
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8

Knowing how and where toposition your business has
never been more important tostand out and raise funds in thisenvironment.

Branding

MarketingWriting

DesignWebsiteComms

Building andstrengthening afirm's identity totell a clearer story.

Developing andupdating collateral
to enhance a firm's
offering.

Editing and/or
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Designing PPTs,
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Scoping, design,development andSEO for websites.

Reactive andproactive, external
and internal
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For further information contact the team at TheHedge@brodiecg.com

www.brodiecg.com

The Hedge

DECEMBER 2022

ESG
GOOD COP... BAD COP

GOLDMAN FINED FOR
ESG FAILURES

It has never been more critical for funds and managers to havea robust ESG policy. It is no secret that the doomsday clock isticking. We all know change is required, but all too often, it issomething to look at tomorrow, and then it will be too late.

Goldman Sachs has been
fined $4 million by the SEC
for ESG investment policy
failures.

Unfortunately, many ESG funds have disappointed, having
underperformed this year, although they are certainly not alone.

According to the SEC,
the asset management
unit had 'several policies
and procedures failures
involving the ESG research
its investment teams used to
select and monitor securities.'

The threat of greenwashing is also too common. If an investor
wants to buy a green fund, they need to be confident that it isdoing what it says. Morningstar made it clear earlier in the yearthat this was not the case - but it is probably just the tip of theiceberg.
There is a great deal of global posturing, but how many COPs
will it take to enforce change? If this is our annual alarm clock,which we promptly put on sleep mode, then it is no good to us
whatsoever.
It will only be by mandating immediate change that you will
see a real difference. Most institutional managers are trying but
not always effectively. Perhaps this is style over substance ultimately, policies and procedures must be the same.
This year, ESG has fallen off the radar. There have been various
good initiatives and fund launches, but they are mostly
small, and many are more of a sideshow. Actions, macro andmainstream, where you are talking to trillions of assets rather
than billions, need to take place to see real change.
We need priorities and positioning, and we need to stick to them.
One of the most prominent advocates of ESG was BlackRock.
Every action and utterance was about the E, the S or the G. Yet
earlier this year, the asset manager partly pulled back, describing
climate-related shareholder proposals as being ‘too prescriptive.’
Unfortunately for BlackRock, they are now somewhere in
the middle, with a somewhat confused position, which is not
ideal when we need leaders in this space. On the one hand,
they have seen investments pulled by the likes of Florida,
Louisiana and Missouri who see ESG as being “prioritised” overshareholder returns; while on the other they have been pilloried
by Democrats who think they have not gone far enough.
Change will only come about as more funds on-board ESG
principles to the extent that not doing so will appear abnormal.
This had seemed to be the case at the start of this year. It is onlywith this that you will see better performances.
Change is required today. The problems are not disappearing- China has pumped out more pollution in the past eight years
than Britain has since the industrial revolution. The fragility of ourworld, particularly catalysed by the geopolitical ructions we are
currently experiencing, has never been more apparent.
As a final note, one of the other problems is complexity. There
are still too many ESG structures and acronyms. It needs to be
more accessible, more unified and better understood. There are,however, promising developments on this front, as you will seein the Perigon Partners article.

Andrew Dean, co-head of
the SEC's asset management
enforcement division, added:"[These] actions reinforce
that investment advisers must

develop and adhere to theirpolicies and procedures,
including ESG research."
This dates back to between
April 2017 and February 2020.
Goldman did not admit ordeny guilt in paying the fine.
Regulators are taking a far
closer interest on ESG claims
and procedures, with anotherexample being Deutsche
Bank's DWS, which wasinvestigated earlier this yearby the SEC and BaFin overaccusations of greenwashing.

ARTICLE 9 OVER ARTICLE 8

There was an interesting
story in the Financial Timeson the direction of flows togreen funds. Taking Refinitiv
Lipper data, the paper foundthat in the nine months tothe end of September, Article
8 products saw outflows of€173 billion, while Article 9
funds saw net flows of €32.8
billion.

As a reminder, Article 8 funds
promote environmental orsocial characteristics, while
Article 9 target sustainable
investments and have a
specific objective.

These flows are perhaps
indicative of theMorningstar clear-out fromearlier this year, which saw
1,200 funds removed from thesustainable list for effectively
greenwashing.
It also makes a good casefor funds upping their gameto Article 9 and employing agreater ESG focus. As Patrick
Wood Uribe, Chief Executiveof Util, commented, "there ishuge potential for much better
products that do the job better."

CHINA FUND INFLOWS
According to Morningstar
Direct data, China-domiciledsustainable funds saw net
inflows in the third quarter for
the first time this year.
During this period, there
were 24 sustainable fundlaunches, totalling $3.7 billion,
compared with 23 in total forthe previous two quarters.
The largest of these was E
Fund CSI SEEE Carbon
Neutral ETF, which launchedwith $374 million.

reasonable numbers,
according to Dean Wang,
Morningstar China analyst,
the take-up has been slow.
He added: "ESG adoption in
China still faces challenges
due to low awareness of ESG
investing... encouragingly,
the Chinese regulator has
been promoting greater
ESG adoption among asset
managers."

Although these areThis newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
month’snews, regulatory
trends, regulatory
developments
and best
practices.
opinions
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thetheauthoronly
does
notnewsletter
constitute personal
adviseor a personal
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We always
seek to maintaintight
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10

The Hedge

DECEMBER 2022

OPINION

EXPLORING HEDGE FUNDS’CONTRIBUTIONS TO THE RACE TO NET-ZERO

Investors’ interest in whether hedge funds have established net zero
investment strategies and targets is on the rise, with questions about
the firm- or product-level net zero targets increasingly featuringin the due diligence process. This is incentivising hedge funds toconsider how the net zero philosophy might work in the context of
their investment strategies. As traditionally, net zero commitments
and reporting have been focused on a specific model of long-term,
buy-and-hold, engagement-heavy equity investing. But, things are
slowly shifting.

A net zero commitment entails defining what share of AUM will be
managed in line with net zero by 2030, with a view to achieving
100% coverage by 2050.

HOW HEDGE FUNDS INCORPORATE NET
ZERO COMMITMENTS

Equally, a hedge fund might invest in asset types for which
methodologies for assessing emissions and emissions reductionplans are much less developed, including sovereign
investments. These challenges will take time to resolve, but thedesire to confront them is building.

Something that differentiates hedge funds from longonly products is their ability to use more sophisticatedinvestment tools and techniques, including shortpositions and derivatives. AIMA argues that thissophistication could ultimately give alternative
investment managers the edge when it comes tosustainable investing.

In the meantime, setting a credible interim target is notstraightforward for a high turnover portfolio that might change
radically in terms of its composition by that date (not an issue that
long-only, index tracking portfolios have to grapple with, given they
enjoy much less freedom than hedge funds in terms of what they
invest in).

REGULATING INVESTMENT MANAGERS’
ESG APPROACHES
Future regulations, such as the FCA’s Sustainability Disclosure
Requirements (SDR), will need to properly accommodate a
range of investment strategies to have the best prospectof supporting the transition to a net zero economy.
We’ve argued that regulation should not ignore theimpact of short positions and derivatives exposuresand that further thought should be given to thequestion of how firms should report on these underclimate or sustainability reporting requirements.

Short selling, for example, can be an
excellent tool for achieving two common
goals of contemporary responsible
investment: mitigating undesired ESG risks,
and, when taken in aggregate, creating an
economic impact by influencing the natureof capital flows through ‘active’ investing.
Jack Inglis, AIMA
We’ve seen a growing industry consensus
AIMA has also underscored the point that any future regulationthat disclosure to investors of both long and shortof investment managers’ ESG approaches should be based on the
exposures to ESG risks is vital to allow them to fully assess how
principle of materiality, whilst also acknowledging the reality that
their investment managers are doing when it comes to sustainability
investment managers can only report on their ESG exposures if theconsiderations.
corporates in which they invest are reporting comprehensive data
How specifically shorting should be handled in the context of net
on ESG factors. This has important implications for the sequencing
zero commitments is currently the subject of a lively debate inof rules.
the industry. This is welcome. For AIMA’s part, we are focused on
Finally, regulators should be mindful of the risk that poorly crafted
ensuring that how hedge funds report to end investors provides
disclosure rules could heighten greenwashing risks, particularly if
sufficient detail about the approach they follow and what its
regulation is based on unclear product boundaries or classification
strengths and limitations are.
systems.

THE CHALLENGES

Investment managers must confront the challenges that arise inarticulating a net zero target for an alternative investment strategy.

Jack Inglis, CEO - AIMA

We’ve argued that regulation should not ignore
the impact of short positions and derivatives
exposures and that further thought should begiven to the question of how firms should report...
Jack Inglis, AIMAThis newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
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and best
practices.
opinions
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notnewsletter
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11

The Hedge

DECEMBER 2022

OPINION (cont.)

COMPLYING WITH THE NEW FCA
CLIMATE-RELATED DISCLOSURES

Hedge fund managers, particularly those with ESG
oriented funds, have been kept busy complying with
the EU’s SFDR (Sustainable Finance Disclosures
Regulation). However, work doesn’t stop there for many
UK managers with the FCA’s TCFD requirements next
on the compliance to do list, and the Sustainability
Disclosure Requirements (SDR) and investment labels
regime on the horizon.
The FCA has introduced new climate-related financial disclosure
requirements, which apply to UK hedge fund managers andother UK investment managers.
The FCA’s disclosure rules arealigned with and based on theexisting recommendations of the
Task Force on Climate-related
Financial Disclosures (TCFD). The
FCA has implemented these rules
as part of the UK Government’s
Roadmap towards mandatory
climate-related disclosures acrossthe UK economy by 2025.
The new rules are a significant
development in the ESG regulatory
landscape and create material
new obligations. Compliancewith these rules will require inscope firms to make mandatory
disclosures, both quantitative andqualitative, on climate-related
matters, including risks andopportunities, and certain climate
metrics.

•

Governance: The organisation’s governance aroundclimate-related risks and opportunities•

Strategy: The actual and potential impacts of climaterelated risks and opportunities on the organisation’s
business, strategy and financial planning
Risk Management: The processes used by theorganisation to identify, assess andmanage climate-related risks

The new rules are asignificant developmentin the ESG regulatory
landscape and creatematerial new obligations.
Lucian Firth, Simmons & Simmons

The rules came into force for a small number of firms on 1
January 2022 (broadly speaking, firms with more than GBP 50
billion of AuM), with the first reports for those firms due by June
2023. For other in-scope firms, the rules will come into force on
1 January 2023, with the first reports due by June 2024. The new
disclosure obligations will not apply to firm which has less than
GBP 5 billion of assets under management.
Firms subject to the rules must satisfy twoparallel new disclosure obligations:

2.

The TCFD recommendations are based around four key policy
themes:•Compliance may require implementation of new reporting
processes, and potentially a broader re-evaluation of the firm’s
approach to climate risks. For firms that are already complying
with TCFD recommendations on a voluntary basis, it will be
important to assess whether such voluntary reporting is incompliance with the specific requirements and scope of the FCA
rules.

1.

Significantly, unlike many SFDR obligations these reports are nottriggered by managing sustainable or green oriented funds andapply regardless of the strategies being employed.

a report prepared at the level of theinvestment management firm, in respectof its investment management activities(TCFD entity report) and• Metrics and Targets: The
metrics and targets used to assess
and manage relevant climate-relatedrisks and opportunities
The TCFD annual report must
be consistent with the fourrecommendations described above
and also eleven recommended
disclosures set out in the TCFD Final
Report.
The TCFD product report disclosurescomprise both a number of core
metrics, and a set of additional
metrics. For example, the core
metrics are:•Scope 1 and 2 greenhouse gas emissions•

Scope 3 greenhouse gas emissions•

Total carbon emissions•

Total carbon footprint•

Weighted average carbon intensity

These disclosures must be supported by contextualised
information, such as explaining how the metrics should beinterpreted and their associated limitations (for example, if
particular assumptions or proxies have been used) and ahistorical time series for comparison (after the first year).
There is no mandatory format for the TCFD entity reports or
TCFD product reports. (This is different to the EU SFDR, whichprescribes the use of mandatory templates for certain key
disclosures). Firms may therefore wish to develop their own
reporting template, or purchase templates from third party
service providers.
Lucian Firth, Partner, Simmons & Simmonsa report prepared at the levelof each in-scope investment
product (funds, managed
accounts) managed by thefirm (TCFD product report).

This newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
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expressed
areexpressed
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newsletterisis
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12

The Hedge

DECEMBER 2022

OPINION (cont.)

THE IMPACT OF DATA ANDTECHNOLOGY ON ESG STRATEGIESAt COP27, we saw an increased urgency in the need totackle ESG and climate change. Policymakers, regulatorsand businesses are facing numerous challenges, including
the perception of greenwashing, managing climate risks andaccelerating the adoption of technology across the world.
The role of technology is vital in creating new opportunities forbusinesses to overcome these challenges. The rapid developmentof ESG technology and data management tools is reflected in
our wider society, which has become far more sophisticatedand tech-savvy. In addition, consumers, employees andinvestors are now more connected and engaged inenvironmental and social issues. So, what is the impact
of technology on ESG and how can businesses use it
to accelerate their sustainability journey?

reporting to enhanced corporate reporting models that include
ESG reporting. The solution to effectively tackle ESG risks lies
predominantly in technology, according to Peter Hirsch, Head of
Sustainability at urban sustainability fund ‘2150’: “Businesses areleveraging tech to deliver on ESG outcomes, and we’ll only see
this space continue to grow over the next few years”.
The requirement to access reliable ESG data on a regular basis is
the key driver for all businesses going forward and the technology
sector is paving the way to bring innovation across key areasof risk. Mitigating risk while maintaining strategic direction
requires a comprehensive ESG data ecosystem.

USING TECHNOLOGY TO KEEP ON
TRACK

BUILDING A RELIABLE ESG STRATEGY
According to a 2021 study by IBM, 90% of consumers
said that the pandemic affected their views onenvironmental sustainability, with 71% of
employees and employment-seekers sayingthat environmentally sustainable companies
were more attractive to them as employers.
A 2022 survey by Navex Global foundthat 83% of respondents agreed that abusiness’s brand reputation is impacted by
ESG factors.

Technology is a key driver for economic growth and that,combined with the growing importance of ESG issues at
the forefront of investor, consumer and employee minds,means the pressures around tracking, reporting and acting
on issues across the ESG spectrum have neverbeen more in the spotlight.

Wayne Ng, Turnkey

It’s clear that the societal shift in recent years to a moreenvironmentally-focused global ethos has meant consumer habits
and attitudes are changing; people care more about the ethicsof the companies they do business with, and as organisations
change to keep pace with this there will, undoubtedly, be
impact across supply chains, investment networks and evenstaff recruitment and retention. Therefore, businesses must build
a long-term strategy to manage ESG risks, identify and track
reliable ESG data and improve outcomes that affect consumers,
stakeholders and investors.

MANAGING ESG RISK USING RELIABLE DATA
Companies will need reliable data to help tackle some of thebiggest issues and risks facing society. According to a recent
study by EY, in the finance sector alone, 74% of organisations
have already seen an acceleration from traditional financial

Technology as a tool to combat climatechange is more prevalent than ever; fromadopting new working practices in sectors
like building and agriculture to everyday
solutions such as using renewable energy
technologies.

For most, the journey starts with an ESG strategy and gathering
clear, informed and analytical data that can inform, shape andinfluence short and long-term goals.

INNOVATION MEETS HUMAN APPROACH
The combination of technology and human insights will be vitalto our journey towards net zero emissions and combating climatechange. Technology should be utilised to make things easier,more productive and better for the environment.
Wayne Ng, Head of Innovation, Turnkey

For most, the journey starts
with an ESG strategy andgathering clear, informed andanalytical data.
Wayne Ng, Turnkey

This newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
month’snews, regulatory
trends, regulatory
developments
and best
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opinions
those
thetheauthoronly
does
notnewsletter
constitute personal
adviseor a personal
recommendation.
We always
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13

The Hedge

DECEMBER 2022

OPINION (cont.)

HOPES FOR GENUINE AND REINVIGORATEDGREEN CAPITAL ALLOCATIONA ROUND-UP OF FRAMEWORK CONVERGENCE AND THE
CREDIBILITY IT WILL BRING TO COMPANIES’ NET ZERO TRANSITION PLANS.
The ESG landscape has been ravaged by challenges thesepast months. Sweeping doubts about the effectiveness andlegitimacy of ESG investing, a violent reminder of our relianceon fossil fuels and energy insecurity spurred by the war in the
Ukraine, a tsunami of legislative and regulatory action to target
greenwashing, and a drought of any real progress from COP26 or
COP27 to name but a few recent events.

legislative adoption. They give companies a clearer architecture
for building towards a net zero economy and standards on how
to measure and report performance. But, significant differences
exist between regions – CSRD, ISSB and the SEC’s reporting
requirements, for example (see the guide below to untangle theacronyms) – demonstrating a lack of coherence by practitioners
and a superabundance of effort.

In medical terminology, a crisis is a turning point for better orworse. We are at that point with ESG and, although I’m confident
in our collective ability to get it onto the path to ‘better’, thebasic materials with which we are rebuilding in the wake ofthese challenges must be of greater quality. In the case of ESG
investing, this goes to the foundations: the ESG plans and impact
performance of the underlying portfolio companies, and robust
evidence of their efforts.

Nevertheless, there is growing hope of convergence, which will
simplify the landscape for companies and contribute to greater
adoption and action. Three new net zero transition frameworks
were announced as part of COP27 last month. While not identical,
two of them at least (GFANZ and TPT) give some comfort
in that they are now devoutly “singing from the same hymnbook” (and the third, UN-HLEG, focuses on a slightly different,
complementary space). Furthermore, they are written in
the same key as the principal international frameworks
and legislation. That key is TCFD, which has done a
successful job of establishing a common structure,
language and guardrails across the globe.

ESG, by its very construction, is a broad church
and following the religion is not always easy. The
emergence of its fundamental text has been tortuous
and the subject matter remains hard to navigate,particularly for companies operating across multiple
jurisdictions, which in turn leads to uncertainty on
how to demonstrate faith. The most urgent, most far
reaching, and most challenging of the components
deserves the most attention: climate change
and the transition to a low-carbon (or ‘net
zero’) economy.
So, how can companies demonstrate theirtransition planning and its impact?

Emma Tottenham, Perigon Partners

Various frameworks have been taking root andgrowing in sophistication, some now reaching the point ofThat two new frameworks demonstrate such closealignment with each other and reinforce common
TCFD foundations should be a sign that quicker
convergence will yield value from here. Let’s hope that
this optimism is well-founded. Time is running out
for markets to rebuild conviction in companies’
transition plans such that investors can takedecisive actions to direct capital where it will
have the greatest positive impact, without fearof inadvertent greenwashing.
Continued over page... significant differences exist
between regions... demonstrating alack of coherence by practitioners
and a superabundance of effort.
Emma Tottenham, Perigon Partners

This newslettera selectionof theprevious
month’ssectorsector
news, trends,
developments
and best practices.
Any
opinionsAny
expressed
areexpressed
those of theareauthoronlyofandnewsletter
newsletterisis
a selectionof theprevious
month’snews, regulatory
trends, regulatory
developments
and best
practices.
opinions
those
thetheauthoronly
does
notnewsletter
constitute personal
adviseor a personal
recommendation.
We always
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14

The Hedge

DECEMBER 2022

OPINION (cont.)
Continued from previous page

‘QUICK REFERENCE’ GUIDE TO THE KEY
FRAMEWORKS.
The Glasgow Financial Alliance for Net Zero’s (GFANZ)
voluntary framework on how to approach transition plans,
launched 1 November 2022. Directed towards the financial
services industry and global in reach. Contains threeprinciples, encompassing five disclosure elements andten recommendations for companies looking to credibly
communicate their net zero transition approach.
The UK’s Transition Plan Taskforce’s (TPT) recommendations
to inform regulatory requirements (i.e. expect to see this in future
UK legislation) on net zero transition plan disclosures. Released 8
November 2022, targeted towards all sectors. Similar in structure
to the GFANZ framework in all regards other than containing 19
rather than ten recommendations.
The United Nations High-Level Expert Group’s (UN-HLEG)
global voluntary framework to support a universal definition of
net zero and prevent it being undermined by greenwash. Also
released 8 November 2022, aimed towards large corporates fromall sectors plus cities and regions. Contains five principles andten recommendations that are less aligned to those above as thefocus is on putting guardrails around the definition of net zerorather than on the entity’s transition efforts.
The EU’s Corporate Sustainable Reporting Directive (CSRD),
which contains rules and requirements for companies to reporton sustainability-related impacts, opportunities and risks.
Currently going through the final stages of legislative adoption,
due to come into force for large companies from 2024. Will
expand the number of EU companies mandated to provide
sustainability (including climate) disclosures from c.12k to c.50k.

The International Sustainability Standards Board’s (ISSB)
principles for sustainability- and climate-related financial
disclosures, currently in exposure draft form with a view to
finalising the new global reporting baseline by end 2022. A sister
body to IFRS (of accounting standards fame), expect to see
widespread adoption even if not mandated.
The USA’s Securities and Exchange Commission’s (SEC)
proposals for mandatory climate disclosure, released March 2022with the aim of being finalised last month but, realistically, likely
to be stuck in no-man’s-land, bombarded by political crossfire, forsome time yet.
Finally, the Task Force on Climate-Related Financial
Disclosures (TCFD): the global framework for climate risk
reporting that implicitly underpins all the above and has also
been explicitly mandated in certain jurisdictions (including theUK). Evidently a successful initiative by the G20 and soon to bejoined by sister TNFD (N for “Nature-Related”) – just in case any
company was ready to rest on its laurels.
Emma Tottenham
Emma is a founding partner at Perigon Partners. Emma has
extensive sustainability, communications and strategy expertise,developed most recently as Group Corporate Communications andSustainability Director for one of the UK’s largest banks. Prior tofounding Perigon Partners, Emma was a member of the Executive
Leadership Team for a FTSE250 company and Board Director for alarge UK digital fundraising platform.
For further information about Perigon Partners services visit
www.perigonpartners.co.uk.

... there is growing hope of
convergence, which will simplify
the landscape for companies andcontribute to greater adoption andaction.
Emma Tottenham, Perigon Partners

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The Hedge

DECEMBER 2022

OPINION (cont.)

CHANGES TO PRIIPS KIDS: DO YOU NEEDTO PRODUCE A KID FOR YOUR FUND?
The PRIIPs Regulation has required fund managers to prepare a
Key Information Document (“KID”) for EU-based retail investors
since January 2018. Although most hedge funds are not targeted
at retail investors, some do accept them in certain circumstances.
This article sets out background in advance of changes to KID
content requirements from 1 January 2023.

HOW ARE HEDGE FUNDS CAUGHT?
An interest in a hedge fund is a type of ‘packaged retailand insurance-based investment product’ (“PRIIP”).
This means the manufacturer of a fund (generally
the investment manager) must produce an EU
KID if that fund is “made available” to EU-based
retail investors. Following Brexit, a UK KID must be
produced if a fund is “made available” to UK-based
retail investors.

4.

These criteria are difficult to meet, meaning most high net
worth investors and the manager’s staff cannot be opted-up.

WHAT’S THE BREXIT EFFECT?
There are now two separate PRIIPs regimes – an EU regime
and a UK regime. From 1 January 2023 there will be significant
divergence between EU KIDs and UK KIDs.

WHAT DOES PREPARING A KID INVOLVE?
A KID is a three page document setting out key features of
the PRIIP. The content is highly prescribed, and complex
calculations are also required to prepare a risk figure,performance details and cost figures. The KID must be
provided to retail investors in good time before they
invest and published on the manager’s website.

HOW BIG ARE THE CHANGES ON 1
JANUARY 2023?

ARE THERE EXEMPTIONS?
There are no exemptions if EU or UK-based retailinvestors buy your fund. However, an adviser
with full discretion for end-clients willbe the relevant investor for PRIIP KID
purposes, and is not a retail investor.

The incoming changes respond to widespread industry
complaints about KIDs following their introduction,although the EU and UK have each responded
differently. The EU KID content is changing
significantly and some managers will also be
John Dooley, Simmons & Simmons
You could avoid producing a KID byrequired to publish additional information on‘opting-up’ a retail investor to professional investor
their website. The UK KID requirements will change
status. This option may be available if: (i) you consider theto a lesser degree.
investor capable of making their own investment decisions and
WHAT TO DO NOW?
understanding the risks, and (ii) the investor meets two of thefollowing three criteria:
Check now if a fund is being “made available” to EU or UK-based1.

has carried out transactions, of significant size, in similarfunds at an average frequency of 10 per quarter over theprevious four quarters;

retail investors and, if so, produce the relevant new form KID from
1 January 2023. Your legal advisors should be able to help.

2.

their financial instrument portfolio (including cash deposits
and financial instruments) exceeds €500,000;

John Dooley

3.

they have worked in the financial sector for at least one
year in a professional position which requires knowledge ofinvestments in similar funds.

John Dooley is a Managing Associate at Simmons & Simmons andspecialises in investment funds and advising asset managers on
regulatory matters.

From 1 January 2023 there will besignificant divergence between EU
KIDs and UK KIDs.
John Dooley, Simmons & Simmons

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The Hedge

DECEMBER 2022

REGULATION

Presented by

RAISING STANDARDS IN NEW FIRMS
AND FINANCIAL PROMOTIONSThe FCA has created a new function to
help newly-authorised firms adapt to its
supervision.

The regulator acknowledges that newly
authorised firms can sometimes struggle
with its rules, and many firms can growquickly in their initial stages thereby
exacerbating any problems.
The new function was piloted in 2021 to
2022, with 32 newly-authorised firms.
One common theme was how well thesefirms understood the rules on promoting
financial products to the public.
For example, some firms were describing
their products and services as ‘FCA
approved’ on their website. However, the
FCA does not ‘approve’ firms’ offering as
such; it authorises firms and gives them

permission to offer regulated products
and services. Similarly, firms wrongly
claimed on their websites 'We worked withthe regulator to deliver a product/ service'.
The FCA doesn’t collaborate with firms todevelop what they offer.
Other issues included firms advertising
services that the FCA hadn’t given them
permissions for, and firms advertising
attractive investment returns that they
couldn’t substantiate.

This initiative coincides with the FCA
adopting a more ‘hard-line’ stance whenprocessing FCA applications. This has
led to a more forensic approach, which
increases both the amount of resource
applicant firms need to devote to theprocess and the total time it takes tocomplete the authorisation process. There
has also been an increase in unsuccessful
applications.

The FCA has now launched Phase 2 of thepilot, increasing the number of newlyauthorised firms it’s reviewing to 300. It
will use the findings of this next stage to
identify other common areas where firms
need to raise their standards to meet its
rules.

DIRECTOR BANNED BY FCA AFTER VIOLENT CRIMINAL CONVICTION
The FCA has banned Ashkan Zahedianfrom working in financial services following
his conviction for serious, violent offences.

Mark Steward, the FCA’s Executive
Director of Enforcement and Market
Oversight said:

Mr. Zahedin was the sole director of a FCA
authorised consumer credit firm and wasapproved by the FCA as a Senior Manager.

'These were serious, violent criminal
offences reflecting on Mr Zahedin’scharacter and justifying the finding that heis not a person to be working in financial
services.

In May 2020, Mr. Zahedin pleaded guilty
and was convicted of grievous bodily harmand possession of an offensive weapon,
having attacked a security guard at a bar
with a machete. He was sentenced tothree years’ imprisonment.

actions demonstrating dishonesty,
such as committing fraud, and includes
offences against the person and otherserious offences. In September 2021, the
FCA banned Jon Frensham following his
conviction of attempting to meet a childfollowing sexual grooming.

This case acts as a reminder that the
FCA can deem an individual to be not
fit and proper due to actions outsideof the workplace. This extends beyond

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17

The Hedge

DECEMBER 2022

REGULATION (cont.)

Presented by

FORMER BANK CEO CENSURED OVER ANTI-MONEY
LAUNDERING FAILINGS
The FCA has publicly censured
Mohammad Ataur Rahman Prodhan, theformer Chief Executive Officer of Sonali
Bank (UK) Limited (SBUK) for antimoney laundering (AML) failings.

and a restriction was placed on the
take-on of new customers. Steven Smith,
SBUK’s MLRO, was also fined £17,900
and prohibited from holding complianceoversight and MLRO positions.

In 2012-2014, Mr. Prodhan failed to takereasonable steps to assess and mitigate
the AML risks arising from a culture of
non-compliance among SBUK’s staff. He
failed to ensure that there was a clear
allocation of responsibilities to oversee
SBUK’s branches, and he also failed toproperly oversee, manage and resource
SBUK’s Money Laundering Reporting
Officer (MLRO) function.

The FCA initially fined Mr. Prodhan£76,400 in May 2018. Mr. Prodhan
referred the case to the Upper Tribunal,
where proceedings have been delayed
significantly as a result of the pandemic
and limitations on Mr. Prodhan’s ability totravel to the UK from Bangladesh, where
he now resides.

In 2016, SBUK was fined over £3 million

be resolved by agreement, including thelack of any prospect of enforcing paymentof a financial penalty.
Mr. Prodhan has withdrawn his referral to
the Upper Tribunal and agreed to accept apublic censure.
Whilst the outcome vis-à-vis Mr. Prodhan
is perhaps less than satisfactory from the
FCA’s perspective, this case does act asa reminder that both a firm and its senior
managers can be sanctioned over acompliance failing.

While the FCA considers the financial
penalty to be appropriate, there now exist
exceptional circumstances for the case to

CFTC RECOGNIZES THE FCA FOR
CROSS-BORDER ENFORCEMENTCOOPERATIONThe CFTC has recognized and expressed
appreciation to the FCA for taking actions that
demonstrated critical cross-border cooperation toensure the integrity of U.S. markets and markets
abroad.
During an investigation into certain crude oil
trading on a US derivatives exchange, the FCA
obtained information from UK based traders onbehalf of the CFTC. Subsequently, said traders
challenged the FCA’s authority to obtain suchrecords, but permission to proceed with a judicial
review was refused by the Court of Appeal of
England and Wales.
According to the CFTC, the court’s decision“shows that traders cannot hide from regulatory
oversight just because they are overseas. The CFTCis grateful for the FCA’s efforts to secure this result
and its commitment to cross-border enforcement
cooperation”.

This newslettera selectionof theprevious
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18

The Hedge

DECEMBER 2022

REGULATION (cont.)

Presented by

SEC ANNOUNCES ENFORCEMENTRESULTS FOR FY2022
The SEC has announced that it filed 760 total enforcement cases
during its recently ended fiscal year, compared to 697 the year
before. The 9% increase included 462 new, or "stand alone,"
enforcement actions which ranged from traditional securities law
violations to “first of their kind” cases in the crypto space.
Money ordered in the SEC’s actions totalled $6.4 billion, an
increase of 67% from FY2021 and the highest on record. It wasalso the second highest year ever in whistleblower awards, bothin terms of the number of awards (103)and the total monetaryamount rewarded ($229 million).
Some cases of particular interest:•••

Penalties totalling $1.235 billion (17 entities) for failing tomaintain and preserve work-related text messages on
employees’ personal devices.
Enforcement action against individuals, including charging
the former CIO of an asset manager for allegedly overvaluing
assets managed by the firm by more than $1 billion.
Parallel investigations with criminal law enforcement
including cases against Archegos Capital Management
and its founder/owner Bill Hwang, who were charged withorchestrating a fraudulent scheme that resulted in billions ofdollars in losses•

Using data analytics to assist in various enforcement actions
related to market abuse (market manipulation and insider trading).

•

A continued focus on cybersecurity and crypto-related
enforcement actions.

•

An increased focus on ESG-related enforcement actions,
including an action charging BNY Mellon for materiallymisleading statement and omissions on their considerationof ESG principles when managing certain mutual funds. See
the above article ‘Goldman fined for ESG investment failures’for further examples.

•Private fund-related enforcement actions including in relationto: A fraudulent scheme to conceal the downside risks of acomplex options trading strategy
 Failure to comply with the Custody Rule
 Misrepresenting fund performance and misappropriating
investor funds for personal use
 Failing to properly offset management fees charged to
private equity funds and making misleading statements toinvestors about fees and expenses

Capricorn Fund Managers and RQC Group are proud members ofClick here to subscribe to The Hedge; or if you have a question about the publication or suggestion for aguest article send an email to the editorial team at thehedge@brodiecg.com
This document has been produced by Brodie Consulting Group in conjunction with RQC Group and Capricorn Fund Managers.

Brodie Consulting Group is an international
marketing and communications consultancy,
focused largely on the financial services sector.
Launched in 2019 by Alastair Crabbe, the former
head of marketing and communications at Permal, the Brodie team has extensive experienceadvising funds on all aspects of their brand,marketing and communications.
Alastair Crabbe
Director
Brodie Consulting Group+44 (0) 778 526 8282
acrabbe@brodiecg.com
www.brodiecg.com

Capricorn Fund Managers Limited is aninvestment management and regulatory
hosting business that provides regulatory
infrastructure and institutional quality
operational, compliance and risk oversight.
CFM is part of the Capricorn Group, aninternational family office, which has been
involved in alternative assets since 1995.
Jonty Campion
Director
Capricorn Fund Managers+44 (0) 207 958 9127
jcampion@capricornfundmanagers.com
www.capricornfundmanagers.com

Founded in London in 2007 and with adedicated office in New York, RQC Group is
an industry-leading cross-border compliance consultancy specializing in FCA, SEC
and CFTC/NFA Compliance and Regulatory
Hosting services, servicing clients with AUM
in excess of $295 billion.

United Kingdom:+44 (0) 207 958 9127
contact-uk@rqcgroup.com
United States:+1 (646) 751 8726
contact-us@rqcgroup.com
www.rqcgroup.com

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A Brodie Consulting publication in conjunction with Capricorn Fund Managers and RQC Group.
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