Specialist hedge funds target returns in clean energy
Strong growth prospects for the world clean energy sector are attracting ever-increasing activity by fund managers. Recent years have seen the launch of dozens of mutual funds, exchange-traded funds and quoted investment companies specialising either in renewable energy or in wider low-carbon or environmental themes. However, according to research by New Energy Finance, clean energy is now also proving a magnet for specialist hedge funds and funds-of-funds.
Analysis by New Energy Finance suggests that at least $750m is now under management by specialist long-short equity funds focusing on clean energy, “clean tech” or the environment. New Energy Finance believes that by the end of this summer, there will be at least 22 specialist hedge funds worldwide with a brief to invest in quoted equities in clean energy, or with a wider remit to invest in quoted equities in clean energy and other related sectors such as water and waste management.
Managers of funds-of-funds contacted by New Energy Finance predict that the number of hedge funds specialising in environmental and climate change themes, including those trading carbon emissions, will be in the hundreds within a few years. The number of funds-of-funds in clean energy and the environment is itself increasing, with six launched in 2007 and 2008 managing in aggregate some $300m.
Michael Liebreich, chairman and chief executive of New Energy Finance, said: “Given climate change and energy security pressures, investment in clean energy is set to grow rapidly from the $148.4bn figure reached worldwide in 2007. That gives big opportunities not just for long-only fund managers, but also for specialist long-short hedge funds looking to take advantage of valuation anomalies or aiming to reduce volatility for investors.”
Clean energy stocks have performed strongly since 2004, boosted by government policies backing renewables and by the rising oil price. However they have also been volatile – often substantially more volatile than the wider equity market. One reason is that many of the companies specialising in clean energy are young, fast growing concerns without long trading histories.
In 2007, the WilderHill New Energy Global Innovation Index, or NEX, which tracks the performance of 91 clean energy stocks worldwide, rose 58%, taking its appreciation since the beginning of 2004 to 350%. However in 2008 so far, the NEX has slipped back some 19%.
The New Energy Finance research shows that those hedge funds specialising in clean energy differ markedly in several respects. First, they split into “narrow” funds that invest mainly in renewable energy and energy efficiency, and “broad” funds that invest in those areas but also seek exposure in related environmental sectors. Second, some funds include nuclear power within their definition of clean energy or clean tech, while others do not. Third, some hedge funds have a strong long bias, using short positions only as a stabiliser, while others run a significant percentage of short, as well as long, positions in clean energy stocks.
New Energy Finance’s research concentrated on hedge funds with a specific clean energy, clean tech or environmental focus. It did not cover the often very large, generalist hedge funds that invest a small part of their portfolios in the sector.
ABOUT NEW ENERGY FINANCE:
New Energy Finance is the world’s leading independent provider of research to investors in renewable energy, biofuels, low-carbon technologies and the carbon markets. The company’s research staff of 120 (based in London, Washington, New York, Palo Alto, Beijing, New Delhi, Tel Aviv, Cape Town, Sao Paulo and Perth) tracks deal flow in venture capital, private equity, M&A, public markets, asset finance and carbon credits around the world.
The New Energy Finance Desktop is the world’s most comprehensive subscription database of investors and investments in clean energy. New Energy Finance’s Insight Services provide deep market analysis to investors in Wind, Solar, Biofuels, Biomass, China, VC/PE, Public Markets and the US. New Energy Finance is co-publisher of the world’s first global stock-market index of quoted clean energy companies, the WilderHill New Energy Global Innovation Index (ticker symbol NEX). The company also undertakes bespoke research and consultancy, and runs the New Energy Finance Summit and Awards, bespoke executive workshops on clean energy and carbon market issues, and senior-level networking events.
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