The Fund Balance Socially and Environmentally Conscious Market Neutral Investment Strategy

Executive Summary

Fund Balance is developing quantitative market neutral public security strategies with Environmental, Social and Governance (ESG) logic. It will be the first such platform we know of in the ESG space.

At its core, FBESG Market Neutral will be a financial engine that profitably moves money from companies in the business of war and pollution into those focused on peace and sustainability with reduced risk to the investor.

The basic system will use pattern identification to trade the public markets based on computationally identified market trends overseen by talented technical traders and market timing experts.

Financial engineers have recently created new systems to make money regardless of which way the markets are going, rapidly adjusting to trends up or down. We add ESG logic so it works like this: as markets or individual equities move up, the strategy takes long positions in the corresponding positive ESG-performance companies. As they move down, the strategy takes short positions in the corresponding negative ESG-performance companies. The key is to identify the trends in a timely manner in order to get in and out of the positions profitably. We plan to use a combination of high quality artificial intelligence and technical trend analysis along with human intelligence to spot or confirm trends that software can’t.

We have developed the logic to screen for positive ESG firms, trading long only in positive ESG, and selling short only in negative ESG. We plan to use third party sustainability analysis from companies like Risk Metrics, Sustainalytics and others to screen companies into long or short buckets. This will not be strictly an exclusions-based portfolio, but one based on ESG performance in the context of traditional bottom line analysis. However, we will focus on market leaders both in the short and long positions with a media and political strategy in place to maximize the engagement.

Fund Balance brings advanced capital markets algorithms to the ESG investor, allowing profitable and responsible investment regardless of market conditions. It’s a powerful partnership, and we hope you will help us realize its potential.

One of Fund Balance’s main objectives is to provide the environmentally and socially responsible investing (ESG) community with the first quantitative long/short equity tool tailored specifically for their needs. This aspect of our plan reflects both the philosophical and quality of life objective of the founders, as well as the burgeoning growth in the ESG investing sector.

One of the disadvantages of typical ESG equity and fixed income investments is the lack of hedged positions. Fund Balance’s strategy will give the ESG community a way to invest in social responsibility that is hedged against general market downturns or specific stock risk. The logic of this system is simple, the implementation elegant, the macroeconomic principles it embraces easily understood.

Fund Balance works with technology partners who provide timing signals for market and specific stock movements. Our trading system will identify short-term movements with precision, and capitalize on these movements with long or short sales as needed. For the ESG market, and for all strategic or values-based investors, an additional logical restriction is required, namely rules on which specific securities to buy, and which to sell short.

Fund Balance’s ESG strategy will involve two baskets. One, the ESG basket, will only trade long. The other, the non-ESG basket, will only trade short. Although theoretically, this limits the performance of the fund (no profits can be taken against the ESG positions or for the non-ESG positions), a well-managed system retains the ability to profit in both market directions, while avoiding the moral and ultimately financial hazard of the negative externalities associated with profiting from pollution or war, or from financially impeding good companies through predatory short positions on high frequency trading platforms.

Let’s look at a theoretical combination of trades to illustrate the principle. We like Super Solar, Inc. It’s highly liquid, well-capitalized, has first mover advantages and rising revenues. It’s on every ESG list. We want to invest, but can’t be sure that it will perform well. The current market is very tight, and even given renewable energy’s advantages in the current policy environment, the risk is high. A simple way to hedge an investment in Super Solar would be to sell short Proud Polluters, Inc. If you look at the recent collapse in the markets, several non-ESG sectors were hit just as hard or harder than the ES sector, for example certain banking, high-carbon energy, utility and defense equities. A market collapse would allow profit taking from the short sale of Proud Polluters to level out falling long positions in Super Solar. For diplomatic reasons, one might short non-ESG indexes rather than specific stocks.

Because our system will “know” when to profit from price movements in either direction, this type of hedged position doesn’t just cover losses, it actually generates profits from movement either way, making sure to be in Super Solar under up-market conditions and short Proud Polluters only in down markets.

While this type of general strategic hedging is easily implemented, it is not easy to do this dynamically the way Fund Balance’s intelligent platform will do it. Although human intelligence and trade monitors will guide our system each day, the system may be better able to distinguish short terms trends and capitalize on them than human operators are, in the same way that IBM’s Big Blue chess system is able to beat all but the best human chess players in the world. This system removes some of the dangerous elements of trading decisions, and allows the investor to focus on their strategic choices of long and short positions.

The risk-adjusted profile of the system could entice generally risk-averse investors into the ESG space, producing both profitability as well as increased social and environmental benefit for all.