Hedgies Get In The Black By Going Green

Feb 23 2007 | 12:36pm ET

Cleantech is the latest buzzword in investing, but hedge funds, often pioneers in new strategies, are tip-toeing into the cool waters of this emerging space.

Peter Fusaro, co-principal of the Energy Hedge Fund Center, says his firm is currently tracking 542 energy hedge funds, a “handful” of which are dedicated to the cleantech space, and interest is beginning to pick up among larger hedge funds and funds of hedge funds with deep pockets.

Trumping the Cleantech Index

David KurzmanOne well-know expert in cleantech investing is David Kurzman, founder of New York-based hedge fund Kurzman Partners. In addition to running his own fund, he serves as a consultant to The Cleantech Venture Network.

“The big trends we’re seeing in the cleantech sector right now include a push for pollution abatement and carbon credit validation, and it looks like we’re going to monetize carbon emissions,” says Kurzman.

Kurzman already has exposure to the carbon credit space with an investment in Environmental Power Corp., which develops, owns, and operates renewable energy production facilities, but he is busy seeking out more opportunities in the space.  “We’re going to be looking for interesting plays that can benefit from the monetizaton of carbon.”

In addition to the carbon market, Kurzman says he is always on the lookout for public companies that take waste and turn it into usable products. His fund has already made an investment in a company that takes supermarket refuse and turns it into fertilizer.

While Kurzman declined to identify his short positions, he did hint that he is looking at the biofuel space, because “that’s a market where you have uncorrelated inputs and outputs, meaning that fuel prices can go down while input prices, such as corn, can go up, putting a crimp on margins.”

Last year, Kurzman CleanTech returned an unaudited 3.8%, while the Standard & Poors’ 500 Index rose 15.8% and the Cleantech Index dropped a stinging 11.4% (the latter since its launch in February). Since the hedge fund’s inception in September 2003, its compounded net return has been a “respectable” 12.8%, versus the S&P 500 Index’s 12.0%.

Going forward, Kurzman says he is planning a hybrid hedge fund, which would invest in a portfolio of both public and private companies.

Water World

Toronto-based Sextant Capital Management takes a more “liquid” approach to the cleantech space. This month, the firm put a cap on its Strategic Global Water Fund Offshore fund after quickly raising €250 million (US$328.5 million).

Sextant’s onshore Strategic Opportunities Hedge Fund, which has exposure to exotic and industrial metals, the oil and gas sector, and water, was up 117% in its first 11 months on the strength of its uranium and water investments in the latter half of the year, according to founder Otto Spork.

“We set up the water fund along the same line as the Canadian resource fund, which is to select smaller-cap, privately-held water companies and look for situations where the companies may have access to long leases to drinking water,” says Spork.

“We felt that fresh water was what people were going to pay the highest prices for,” he says, likening an investment in water to an investment in uranium. “Uranium is seen as the quickest solution for generating energy and not adding to global warming. Companies are building reactors to generate power based on uranium and we’re seeing pricing for that commodity go up from US$76 per pound to above US$100.”

Spork, who invests in companies whose earnings stream comes primarily from water or water-related products with market caps ranging from $50 million to $80 million, estimates there are about 450 companies in the sector. Spork’s funds are looking to invest in companies that plan to list their shares in emerging markets. “A lot of water companies are going to list in Singapore because they’re trying to access the Chinese and Indian markets and Brazil is also listing a lot of water companies,” he says.

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