INTERVIEW - Environment Becoming New Hedge Fund Play
Date: 10-Jul-06
Country: US
Author: Timothy Gardner
Some funds are investing in projects that cut emissions of greenhouse gases in order to earn cheap emissions credits that could be worth much more in the future, said Peter Fusaro, co-author of "Energy & Environmental Hedge Funds."
Such projects range from turning crop waste into fuel or capturing potent greenhouse gas leaking from landfills.
"This is a pure trading mentality, not an altruistic value of saving the world," said Fusaro, co-principal of New York-based consultancy Energy Hedge Fund Center LLC.
With environment investments, the trick is hedge funds must often have the patience to wait a few years between sinking money in projects and profiting from them.
He said before the Kyoto Protocol on global warming was launched in 2005, Dutch investors picked up emissions credits for about five euros a tonne and then profited when carbon prices shot higher.
Hedge funds are now trying to mimic that play by earning emissions credits before the second round of Kyoto trade gets started in 2008, he said.
Under Kyoto's Clean Development Mechanism, investors in rich countries can earn credits by investing in climate-friendly projects in developing countries.
He said smart investors may take advantage of volatility in emissions markets, like the European Union saw when emissions prices crashed and then partially rebounded this spring.
"People have underestimated that the 161 countries that have signed Kyoto have very few skill sets on how to trade emissions. I think 2008 is going to be the same kind of mess and there will be opportunities for those that are market savvy and are buying projects," he said.
In the United States, hedge funds are investing in sulfur dioxide and nitrogen oxide emissions markets and renewable project credits markets. Houston-based hedge fund Centaurus Energy, for example, has made good profits in some of those markets, according to the book.
Other projects in the United States, the world's leading emitter of greenhouse gases, include carbon dioxide sequestration and voluntary carbon trade, since the country does not yet have a federal mandate to control carbon dioxide emissions.
Fusaro said emissions markets and clean energy projects are a logical next step for hedge funds that profited hugely after entering energy markets over the last two years. In 2004 and 2005, some hedge funds earned returns of 40 percent to 50 percent by trading in energy markets, according to Fusaro.
The patience needed in environmental investments has led to a hybrid venture capital/hedge fund model, he said. Many of the emerging hybrid investors come from the ranks of the 4,000 so called "family funds" in which wealthy individuals hire people to invest their money.
"They are willing to take that kind of risk and be patient," said Fusaro. About 100 family funds are making investments in environmental projects, he said.