Can a Hedge Fund Make the World Better?

Atlas Impact Partners has launched one of the first impact investment-themed long-short hedge funds.

The vehicle will invest in companies developing solutions for environmental and social problems, while betting against the stocks of businesses seen as damaging to the world. The fund’s launch will be formally announced next week. 

Several industry veterans teamed up to form Atlas, developing the fund’s thesis last year in response to what they saw as a hole in the market. The founders are David Lowish, a former partner at Generation Investment Management who co-managed $1 billion in private equity and small-cap funds; Rob Brown, former head of research at Just Capital and onetime equity portfolio manager at AllianceBernstein; David Castricone, who helped develop Columbus Circle Investors’ long-short health care strategy; and Richard Billig, who led Morgan Stanley’s prime brokerage. 

“We designed the firm the way we did to avoid any skepticism about impact,” said Brown, who was most recently chair of the research advisory council at Just Capital, a nonprofit that evaluates large U.S. companies’ ESG (environmental, social, and governance) performance.

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Brown explained that many ESG-oriented mutual funds invest in companies that address environmental or social issues by improving operations. For example, a company may change its processes or redesign a factory to be more sustainable.

Atlas considers ESG factors, but the hedge fund goes further by investing solely in companies addressing society’s big problems.

“What a company produces is the defining characteristic for impact,” Brown told Institutional Investor in his first interview about the hedge fund. “That product or service is either solving a large scale problem or exacerbating one of those problems,” he said. “We’re not impact ambiguous.”

Atlas has snagged a high-profile early investor in Peter Knight, who was a founding partner of Generation alongside Vice President Al Gore and former Goldman Sachs Asset Management CEO David Blood.

According to Knight, “Asset owners are doing a lot of impact, but not nearly enough. Why? They continue to think there’s a trade-off between investment performance and sustainable impact. That’s not the case as we proved at Generation,” said Knight, who retired from Generation in 2017. “Atlas is in an asset class that is quite different than many other products out there. They should be competing against the best long-short hedge funds in the country, with a different investment style and a good chance of outperforming.”

Atlas’s hedge fund invests in small and mid-cap public companies whose products focus on, for example, mitigating climate risks, developing health care solutions for vulnerable populations, or improving education. The fund invests around five themes, including sustainable food systems, the environment, and modernizing infrastructure. It will hold stocks in listed companies in the U.S., Canada, developed Europe, and Israel.

The founders aim to deliver risk-adjusted returns in line with or better than similar funds that don’t have an impact goal. 

“We designed a process to screen companies for impact first. Then we’re ruthless stock investors,” said Lowish. “We make the difficult decision about the company and whether it’s impactful enough before we look at valuation. That’s an important lesson I took from Generation: don’t look at commercial opportunities, and then try to pretty them up and make them appear impactful.”

Atlas’s founders believe that by tapping public capital markets, companies can commercialize at a scale beyond what private equity and philanthropy can support.

“What’s refreshing about Atlas is that they’re real fundamental investors rather than closet indexers,” said John Fullerton, an impact investor who founded the Capital Institute in 2010 to reimagine economics and finance. “If they’re successful and attract more capital — and others start similar strategies — that will over time make capital cheaper for the good guys and more expensive for the bad guys.”

Unlike private equity impact funds, the hedge fund will be able to short bad actors.  

“At Generation, investors would say, ‘we see how you can invest in companies with solutions, but what about the ‘bad’ companies?’ That’s how we got to the long-short idea,” said Lowish.