Alt. Energy Funds Gaining Acceptance, Ardsley Enters Field

Jun 23 2006 | 7:06pm ET

Not a week goes by when there isn't some sort of conference or roundtable focusing on investing in energy. The Energy Hedge Fund Center is now tracking over 500 hedge funds that have a "substantial" percentage of their assets invested in energy, including both old fashioned fossil fuels and newer alternative energy sources. Now a sub-sector is emerging from within this group that is focusing exclusively on renewable energy, and it isn't just the small, environmentally-focused money management firms rolling out these funds.

Ardsley Partners, which manages $850 million through its 19-year-old long/short strategy, is launching a fund on July 1 that will focus exclusively on alternative energy.

While the firm has been involved in renewable energy through its parent fund for two years, a source close to the firm said that the time is right for a separate fund, and renewable energy is something that Ardsley sees as a long-term investment opportunity, not a passing fad.

Robert Wilder, founder and ceo of WilderShares, which created The WilderHill Clean Energy Index, says that he is seeing tremendous interest from hedge fund managers looking to enter the clean energy space. He believes that clean energy has become more than a 'niche' sector, and is now an arena that stands on its own merits. "When I think of a niche, I think of a narrow sector, something that is nascent," he said. "Clean energy is much more." He said the field is now made up of everything from wind, water, solar, biodiesel, fuel cells and many other energy sources, and although some of these are still not profitable, some of them are.

"The dig at clean energy is that it is supported by subsidies," he said, pointing out that although this is true to some extent, fossil fuels have always been subsidized, too. "Solar does need subsidies, it isn't cost competitive. Wind however, is cost competitive with natural gas." For example, General Electric, which produces large turbines, has made revenues of $2 billion from its wind generation products.

 Another sign of the increased interest in clean energy is the emergence of new indices that track the sector. WilderShares recently teamed up with London-based New Energy Partners to create The Wilder Hill New Energy Global Innovation Index, which trades on the American Stock Exchange. Since its launch on Feb. 1, the new index is down 4.65%, but Wilder says that is due to recent movements in the overall markets, and that people need to look at the index over the long term —at least a year's time if not more.

"We are trying to track the clean energy sector as close as can be," said Wilder. "We are not aiming to go up in the way an actively managed fund is. That said, the sector has done well, especially over the last three years." He added that the sector is, by its nature, naturally volatile. "This is not your dad's mutual fund. There are single day moves that can swing 5%."

The global index is composed of companies around the world that have technologies and services specializing in the creation and use of clean energy, conservation and efficiency. Unlike the first WilderHill Clean Energy Index, which has overseas exposure but only tracks stocks traded in U.S. markets, the new index focuses mainly on stocks traded outside the U.S. But while the new index is down from its February levels, the WilderHill Clean Energy Index has risen16.3% year-to-date through June 21, and is up a whopping 60.8%since it began trading on Aug. 16, 2004.

Another player in the field is Cleantech Capital Group, which has partnered with AMEX to launch a similar index that also debuted on Feb. 1. The Cleantech Index is comprised of 75 companies with a combined market capitalization in excess of $100billion. Companies in the index must have at least 50% of their sales obtained from cleantech products and services.

Craig Cuddeback, senior vice president at Cleantech Capital Group, said that once an area in emerging technology gets hot, people will suddenly start attaching the term to whatever they are doing, whether or not it really reflects the product. "We can make a case that there are some people calling something 'cleantech' when it really isn't," he said, explaining that is why it is important to screen companies thoroughly, which is what the firm does in conjunction with The Cleantech Venture Network.

But despite the impostors, investment in clean technology is growing at a brisk pace. The Cleantech Venture Network reports that venture capital investment in clean technology during the first quarter of 2006 reached $513 million, which is a six-year-high. That figure represents a 52.9% increase over the same period last year, with much of the funding, 70%, specifically focused on clean energy. Cuddeback expects this trend to continue.

"You will see good growth as a whole in the renewable energy sector," he said. "It is a good value proposition." Just this week, Nanosolar, a firm that produces super-thin solar cells, announced that it has completed a $75-million Series C round of financing to build the world's largest photovoltaic solar factory. Two of the investors are prominent hedge funds, SAC Capital and GLG Partners.

But while hedge funds are investing in the new technology, convincing investors to first invest in clean energy-focused hedge unds is a tough sell. "Everyone says it is an interesting idea, but it is a little early," said Mark Cox, managing partner of The New Energy Fund, an18-month-old hedge fund that invests solely in renewable energy. However, while some are skeptical of an investment vehicle that focuses solely on renewable energy, Cox has seen his fund rise 48.5% net year-to-date. He is a firm believer that now is the time to get in on the game, both for social reasons —he is an avid environmentalist —and for financial profit.

"Prices right now are cheap," he said. "Come any type of improvement in the market, they will rise up."

Growth In Sun, Wind and 'Waste'

So just what sectors are as hot as the tiles on a solar panel? "So far the interest is focused on corn-based ethanol," said Wilder, "but that is not a silver bullet." He believes that the future is in second generation ethanol, which utilizes the scraps from corn stocks and other agricultural waste, so-called cellulose, to make ethanol. "The problem is that the enzymes that can do that are not yet commercialized," he said, but he expects this will soon change.

Meanwhile, Cox is a big proponent of hydrogen and new developments in the industry.

"Hydrogenics [Corp.] were pioneers, but their technology is old," he said. "Now there is some new stuff coming along." He is also excited about fuel cells, but says that cost is still the main hurdle. However, whatever technologies come along to produce clean energy, Cox believes that we will one day look back and be shocked by today's heavy reliance on fossil fuels.

"We will be at a phase, perhaps in five years, or maybe 30, where people will not actually believe that we burned coal in the open atmosphere to get just the energy out of it," he said. "There may be 3-5 trillion barrels of oil, but all of it is finite and all of it is nasty and dirty…here is 3 million times more hydrogen on the planet than there is oil (energy wise) and when you use it, it just turns into water again."

He added that by investing in clean energy, "It is away of using the markets to do something good."

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