This Quant Manager Offers a Rarity: An ESG Fund That’s Up This Year

In the bull market, Welton faced challenges pitching a strategy that would protect on the downside. But the bear market changed everything.

Francois Chevallier and Guillaume Detrait (Courtesy photos)

Francois Chevallier and Guillaume Detrait

(Courtesy photos)

Welton Investment Partners’ ESG multi-asset fund — designed to provide investors with equity-like returns during up markets and downside protection during declines — got its first test in 2022. Most ESG offerings, which are still generally long-only equity strategies, suffered heavy losses this year. In contrast, Welton’s fund returned 8.04 percent through May, according to sources familiar with the performance. The fund, called ESG Advantage, is only a couple of years old, but it’s based on Welton’s two-decade-old, multi-strategy hedging process.

The quantitative manager launched ESG strategies after analyzing the disappointing long-term returns of many of the products in the category. It determined that investors who avoid the stocks of the biggest polluting companies or those with no women in their senior ranks do about as well as a passive index fund. Welton believed it could apply quantitative techniques, including machine learning, that had long been used in hedge funds to improve the investments.

While he declined to comment on the specific performance of the fund, François Chevallier-Gravezat, Research Strategist, Machine Learning Strategies, said that this year has shown that the firm’s thesis was correct. “Between the end of 2021 and the beginning of ’22, it’s been a good case study for our portfolio,” said Chevallier-Gravezat, a computational mathematician who has solved more than investing problems. He previously modeled the radiological impact of climate and landscape changes on British nuclear waste repositories.

In the bull market in 2021, he said that the strategy performed as well as the benchmark. This year, when most equity products are struggling, the multi-asset approach allowed it to outperform benchmarks by a significant margin. “We are delivering the type of returns you’d expect in a bull market, and mitigating the effect of market downturns, while at the same time also preserving ESG attributes,” Chevallier-Gravezat added.

When it was researching the ESG idea, the firm thought it was odd that most investors only subjected stocks to ESG scrutiny, rather than a broader range of asset classes. Welton’s multi-asset platform could provide investors some cushion and perhaps keep people invested, even when things get stressed.


“In the end, you don’t want investors to run away from ESG when there is a market event,” said Chevallier-Gravezat.

The multi-asset approach had been a headwind. For one, investors just weren’t buying into hedging strategies — at least until recently. The fund practically matched the return of the S&P 500 during the bull market. But the fact that it was still just “almost” deterred some investors.

The question of whether or not ESG factors can lead to alpha, or outperformance, has been one of the biggest debates among academics, investors, and managers in the fast-growing category. (Investors often put money into these funds for reasons beyond performance, including to help mitigate climate change.) Welton isn’t shy about its contrary view on the subject. While the manager believes that in the long term ESG factors can lead to alpha, they’re a little skeptical that it leads to returns that can’t be explained by the benchmark in the short term.

Guillaume Detrait, president and chief risk officer, said, “We believe that the current ESG alpha is a long-term one that will manifest through capital flow out of non-compliant ESG markets and into compliant ones, and we do aim to capture that alpha through capital allocation in Advantage.” But the chief risk officer added that “we’re also concerned with short and medium-term alpha and we have, so far, not found any statistical evidence that ESG data can help with that. This is why Advantage uses other, more traditional, data sources to generate performance over short and medium time frames.”

Detrait said some ESG investors have a hard time grasping the value of a systematic manager offering ESG investments as the approach is deliberately dry when compared to the passion many investors bring to the topic. Still, others immediately understand that quants can improve the investments by taking the emotion out of the process.

Chevallier-Gravezat is adamant that investments have to strike a balance between passion for ESG and bottom line performance. “You can’t just do ESG for the sake of doing ESG. You need to keep in mind [that] the product’s objective [is also] to deliver return. This is something that wasn’t so clear in 2021, but when it’s more difficult, like now, I think people will come to the realization that performance matters, as well as sustainability,” he said.