Sustainability

Lynx manages quantitative strategies using a fully systematic investment process. Investments are made in futures contracts on equity indices, fixed income, commodities and currencies, and in currency forwards. Lynx has a conservative market selection approach with a focus on the most liquid markets in order to minimize market impact and not disrupt or materially affect market prices. We aim to ensure that our positions and trade volumes are small in relation to the daily volumes in those respective markets and we have a dedicated team of researchers responsible for the algorithms used in our trading process. This team gathers data on each order, focusing on market liquidity and trade volumes, and reports to the Investment Committee with their findings.

The investment styles adopted, and the derivatives traded in the form of futures and forwards, do not involve discretionary fundamental analysis or security selection of single stocks or corporate bonds. Further, the instruments traded do not entail any legal ownership of the underlying assets and as such no voting rights can be exercised that would enable Lynx to be an active owner with influence on any company or other entity. With that said, the Lynx program is screened quarterly by the independent Brummer & Partners’ Risk and Sustainability teams. These teams collaborate with the an external expert to identify direct holdings in companies involved in certain controversial activities linked to established ESG standards, such as the UN Global Compact framework and the OECD Guidelines for Multinational Enterprises. The screening process also covers companies directly involved in thermal coal, or the development, production, maintenance or sale of weapons that are illegal or deemed particularly controversial because of the disproportionate harm they may cause. As expected, the derivative instruments traded by the Lynx strategies render this type of screening service to be less relevant.

Lynx has been carefully monitoring the emergence of equity index futures that incorporate ESG factors into their construction process. Lynx started trading three ESG futures in 2021: OMX Stockholm 30 ESG Responsible Index, Stoxx Europe 600 ESG-X and S&P500 ESG. More recently, to support derivatives exchanges in their efforts to enable the green transition when de­veloping products, we started trading carbon emissions, ethanol and electricity contracts.

Lynx has a policy which outlines how sustainability risks are integrated into its investment decision-making process and how environmental, social or governance (“ESG”) events, if they occur, can cause an actual or potential material negative impact on the value of an investment in a fund. Our strategies do not have sustainable investment as a primary objective, however, Lynx´s approach to ESG integration is guided by a set of overarching principles and beliefs. Over the past years, the firm has increased its focus on sustainability and ESG risks. We consider a sustainable global financial system as being necessary for long-term value creation.

Sustainability risk factors are considered as part of the broader investment process, meaning that any ESG related risk in traded instruments is assessed vis-à-vis other risks and investment considerations. This approach ensures that the portfolio management teams at Lynx are aware of and take informed investment decisions with knowledge of key ESG related risks that ultimately might have an impact on an investment´s risk and/or return.

Sustainability risks (including those identified below) are also implicitly integrated into the proprietary models and portfolio construction as volatility in prices are captured by Lynx´s short, medium, and long-term systematic models. Furthermore, the quantitative models employed in our strategies are neutral to being long or short in an instrument (where shorting is allowed), over time thus contributing to liquidity in the market and diminishing extreme price swings from supply/demand imbalances. ESG factors are also carefully assessed in the investment process when selecting new instruments to trade.

Risk Disclosures

Lynx has primarily identified three key sustainability risks that may have a material negative impact on the value of an investment / underlying assets to which a fund may be exposed:

• Physical risk: Global climate change is driving increasingly extreme weather events, including heatwaves, severe flooding, and droughts, along with long-term shifts in growing seasons and precipitation patterns. These environmental changes pose tangible risks that can have ripple effects on financial markets and derivatives. This is particularly true for agricultural commodities traded in our programs that have long been exposed to weather-related risks. These contracts have been classified as highly exposed to sustainability factors and have therefore been assigned a lower maximum risk allocation by the Investment Committee as a function of this classification.
  
• Transition and regulatory risk: The global transition away from reliance on fossil fuels or legacy commodities that are produced unsustainably presents a host of challenges. Specifically, migrating futures market liquidity from one contract to another cannot be done overnight. Market participants need time to unwind their existing positions and bring new contracts into their trading and clearing systems. Transition periods managed ineffectively may result in a lack of real price discovery and increased price volatility for end-users and throughout the real economy.
  
• Geopolitical risk: Geopolitical risks remain exceptionally high. Prolonged conflicts in key regions continue with no clear resolution in sight. While the initial disruptions to agricultural and energy markets have moderated over time, the significance of these regions as major commodity producers means any further supply chain disruptions could lead to market volatility. Additionally, ongoing instability in other parts of the world raises concerns about regional escalation, which could threaten critical sectors such as energy production. Meanwhile, shifting trade policies and protectionist rhetoric in major economies have increased the risk of trade tensions, potentially leading to significant repricing of financial and commodity assets with far-reaching implications for global markets.

Lynx ultimately believes that ESG factors can potentially have a material impact on long-term financial performance. Poorly managed ESG risks can lead to inefficiencies, operational disruption and reputational risk, which may ultimately impact our ability to manage the strategies. The impacts following the occurrence of a sustainability risk may be numerous and vary depending on the specific risk. To the extent that a sustainability event occurs, there may be a sudden, material negative impact on the value of an investment, and hence the Net Asset Value of a fund.

Lynx does not currently consider the principal adverse impacts of investment decisions on sustainability factors. Lynx deems the guidance on how the new regulatory framework (Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector) applies to our type of strategies to be insufficient and it is our assessment that the instruments traded do not have any material adverse impacts.

Lynx invests mainly in equity indices, bonds, currencies and commodities through exchange traded futures across global markets and in over-the-counter foreign exchange forwards. Trading in derivatives poses significant challenges in assessing and measuring adverse impacts as we are not the legal owners of the underlying assets. Neither can we engage with companies on sustainability-related matters as we never receive voting rights through our investments. Furthermore, participating in certain macro markets like commodities does not necessarily mean that we can attach a carbon footprint to the contracts that we trade. Emissions have already been attributed to companies or ultimate users of commodities. Since we always roll the long and short positions we trade before expiry, we have no knowledge of how a commodity will ultimately be used, or if emissions have already been attributed to the parties that will take delivery. As a firm we have the ambition to report impacts when guidance on the handling of derivatives and long vs short positions becomes available.

The EU-taxonomy is a classification system that aims to establish common criteria for sustainable economic activities. The Funds’ investments do not take the EU criteria for environmentally sustainable economic activities into account, as are set out in Regulation (EU) No 2020/852, also known as the Taxonomy Regulation.

The company’s remuneration policy seeks to ensure that the remuneration (fixed and variable) paid to employees promotes effective risk management while not encouraging excessive risk-taking. To be able to ensure this, the policy contains guidelines on how the company seeks to identify, measure, govern, internally report and control the risks associated with remuneration systems in our business.

It is of importance to Lynx that the employees integrate ESG-thinking into applicable parts of the investment process. Employees are encouraged to seek new and better ways to improve work with sustainability risks and adverse impacts in the investment process. Employees are also encouraged to pursue new and improved ways to create ESG-friendly products and services.

Employee efforts that lead to either the identification of new sustainability risks or the company being able to mitigate adverse sustainability impact, are endorsed by the company. Such efforts (among others) are to be taken into consideration when variable remuneration is being considered. By linking ESG issues to remuneration the company hopes to achieve financial impact on employees whose compensation is linked with ESG measures, driving better ESG performance.

Our primary engagement approach is to work directly with derivatives exchanges and industry organizations to influence their efforts in enabling the green transition when developing new standards, practices, and products.

To the extent that derivatives exchanges have unique knowledge of the underlying marketplace, and in some cases collaborate with trusted standard-setters, Lynx will support and encourage this industry-led process with the ultimate goal of including and improving sustainability factors when setting contract specifications. Liaising with the exchanges and industry organizations can enhance our understanding of ESG risks related to our investment universe as well as open up opportunities to potentially include new ESG-related investments.

The UN Principles for Responsible Investment (UN PRI)
Lynx has been listed as a UN PRI signatory since 2016. The PRI is a member-led initiative aimed at promoting responsible investment across the investment industry and it encourages investors to use responsible investments to enhance returns and better manage risks. Its six principles are voluntary and aspirational, offering a menu of possible actions and providing direction for responsible investment efforts.

The Standards Board for Alternative Investments (SBAI)
Lynx is a signatory of the SBAI, formerly known as the Hedge Fund Standards Board. The SBAI is an initiative that is aimed at creating and promoting standards of good governance, transparency, valuation, risk management and shareholders conduct for the alternatives industry.

Alternative Investment Management Association (AIMA)
AIMA is the global representative of the alternative investment industry, with around 2 000 corporate members in over 60 countries. AIMA´s manager members collectively manage more than US $4 trillion in assets. Members can access guidance relating to business practice, due diligence and compliance, attend educational and networking events and actively playing a role in policy development. AIMA also supports the alternative investment management industry with regards to responsible investment by developing practices and guidelines.

The Company’s Chief Executive Officer has the specific responsibility for compliance with this obligation. The ongoing work with the Company’s environmental resource management rests with Lynx’s Office Management function, which also communicates with the landlord on these issues.

The aim of our environmental resource management plan is to increase the awareness of both the Company and its employees and to proactively work against any negative environmental impact of the business. The goals are to reduce the Company’s power consumption, to sort waste and recycle when possible, to ensure that hazardous waste is handled in a safe manner and to use eco-labeled products to the extent possible. All business related flights are compensated for CO2 emissions.