ENERGY FUNDS
or returns. That was clearly the case with the market meltdown in
Phase I of the EU ETS in April last year, when some savvy carbon
market managers maximised their short positions and did not lose
much value the week when CO
2
prices fell from EUR30 to
EUR9/tonne. A long-only strategy in carbon, which is the bias in the
market, can be disastrous.
In this new era of carbon market development, it is necessary to
keep a carbon inventory at all US, European and Asian companies
as a reference. That leads to emissions trading through both volun-
tary and mandatory markets which have their own ‘learning
curves’.
The ultimate goal on the carbon roadmap is the promised land
of a low carbon economy – still decades away. The present reali-
ty is that emissions continue to grow each year (with or without
the Kyoto Protocol). Carbon asset and risk management are now
poised to take off. Beware, however, as this is going to be a
bumpy ride.
More Energy & Environmental Hedge Funds to Come
Despite all the recent turmoil triggered by the US subprime
mortgage debacle on hedge funds, we expect many more energy
and environmental hedge funds to spring up next year. This is
because these markets are still financially immature. We view the
energy trading market in all structures at US$3 trillion in notion-
al value and rising, while the global energy market is over US$5
trillion in size, and rising. The more immature environmental
financial markets are US$41 bn. The carbon markets are posi-
tioned to be the first global commodity market since oil. It is the
money and the confluence of market drivers – such as higher sus-
tained energy prices, rapid technology shifts and global environ-
mental standards – that is accelerating interest in energy and
environmental markets, driving capital deployment into this sec-
tor. Hedge funds are the pioneers in these markets and are will-
ing to assume more risk than investment banks. They are ‘morph-
ing’ into project financiers in new energy and clean technology –
a role that was not predicted.
... the problem facing this new market is not lack of
capital, but lack of good managers
Additionally, there is an expectation that there will be more
hedge fund market blow-ups ahead due to their weaker capital
base (certainly compared with investment banks), but that goes
with the territory. It has always been said that energy is a risky
business, but with that risk comes reward. Stellar energy and envi-
ronmental hedge fund managers can show superior returns year in,
year out. This sector is an asset diversification play for investors,
many of whom unfortunately do not know it well. It is this lack of
research and real due diligence, rather than routine box checking,
that dissuades investors from taking the plunge into the best mar-
ket opportunities.
The next new wave of activity is more green fund-of-funds. Expect
an avalanche as investors go for green exposure with less risk
•
Peter Fusaro is Chairman of Global Change Associates, a New York
based energy and environmental consultancy and co-founder of the
Energy Hedge Fund Center LLC.
www.energyhedgefunds.com
COMMODITIES NOW SEPTEMBER 2007 63
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