'Green' Hedge Fund Picks Giving Over Screening

Mar 21 2007 | 3:04pm ET

Socially responsible, sustainable and green investing is on everyone’s lips these days, especially on the very influential lips of some of the country’s largest public pension funds. But the inconvenient truth is that not every money manager with a social conscience has the experience or know-how to run a successful green investment.

A Connecticut hedge fund shop may have an answer: Do good while doing what you’re good at.

Topwater Investment Management hopes to roll out its Topwater “Green” Fund in May. The strategy will be familiar to the firm’s investors, as the Green Fund will be essentially a mirror of its flagship fund, the Topwater Exclusive Fund, which invests in Topwater’s three strategy-specific funds. The difference is that in the Green Fund half of the fees collected are to be donated to a variety of worthy environmental organizations and charities.

“My partner and I are supporters of this cause and think it has hit a tipping point, and we want to do our part to drive it along,” Bryan Borgia, principal of the Norwalk-based firm, says. “That said, our acumen does not lie in actually investing in green-based companies or businesses, so the concept of launching a fund directed at that made little sense.”

The Topwater Green Fund is essentially an experiment in two-way giving. Instead of the 15% performance fee charged by the flagship fund — all of Topwater’s funds have feature performance-only fee structures — the new fund will charge 20%, of which half will be charitably donated. “We’re taking a cut in fees, (15% to 10%) and the investor’s paying a little bit more in fees (15% to 20%), but it’s a little give on both sides to support the cause,” Borgia says. "That said, relatively speaking the overall fee is below industry norms so I think the Fund makes sense for the right investor.”

Borgia says he is very aware that Topwater is going out on something of a limb. He’s spoken to a few interested institutional investors, but acknowledges, “it could go nowhere.”

“We’re not going to do a ton of marketing behind it,” he says. “We’re going to talk to people who are behind the cause. It will either grow on it’s own”—organically, you might say—“or it will stay small and be what it is.”

The fund is a hybrid long/short-asset-backed lending vehicle. The three underlying funds it invests in, all run by Topwater, include a fund of funds investing in both strategies, a multi-manager U.S. equity and options portfolio and the Green Mountain Finance Fund, which originates and participates in secured loan deals. The Topwater Exclusive Fund, on which the Green Fund is modeled, has posted double-digit returns in every full year since its launch in 2002, has 100% positive monthly performance, and is up 2.24% year-to-date.
Borgia credits Vermont—“a state known to champion this issue”—as a source of his firm’s environmental activism: Borgia’s partner, Travis Taylor, is a native of the Green Mountain State and a graduate of the University of Vermont, and Borgia attended the state’s Middlebury College. After graduating, Borgia, rode the Internet wave until he met Taylor, at the time a market-maker in Nasdaq-listed stocks at Fleet. When the two teamed up to found Topwater in 2002, they started small and survived the typical difficult start. Topwater got a firm foothold in 2004, with assets now in the nine digits; they have since rolled out separate funds for their specific strategies.

As for the Green Fund, while Borgia says he “would like for it to ramp quickly,” he says he would be encouraged to see a couple of investors make early contributions taking it to $50 million by year's end. And he’s well-versed in the language of transparency so prevalent in the world of social-responsible investing. In addition to the usual stuff in the quarterly letter, Borgia plans to enumerate the exact dollar amounts generated in fees and to which charities it went and why.

“This particular issue is one that makes sense to people, that needs awareness and needs backing, hopefully this fund will be a way for us and our investors to support the cause,” he says.

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