Early in 2009, CF Partners of London will launch a new 50 million euro (USD$70.06 million) hedge fund designed to profit from volatility in carbon markets.
The CF Carbon Fund will be one of the first dedicated carbon hedge fund products of which I'm aware. Others will likely follow.
The Fund, according to CF Partners "adopts a relative value and arbitrage-based approach to trading carbon and the correlation of carbon with other global energy markets. It seeks to capitalize on pricing inefficiencies and dislocations in these markets."
The European Union's endorsement of climate goals stretching to 2020 may make the EU's emissions trading scheme a stronger investment, according to Michael Szabo at Reuters, who reported on the announcement in London this morning. And "recent volatility in commodities markets has opened shorting opportunities."
"To date in the carbon space the majority of the players from a fund point of view have been long-only guys," Simon Glossop, one of CF's founders, told Reuters. "That's been a workable model up to this year, but carbon has now become an asset class in its own right instead of a compliance tool."
The global carbon market, which has an anticipated of US$100 billion this year, allows companies to trade rights to emit greenhouse gases.
Carbon prices, which are closely linked to energy prices, have fallen nearly half from a peak price last summer of 29.69 euros (US$41.60), according to Reuters.
Questions surrounding a new global pact on climate and uncertainty about future energy prices has made for a rocky carbon road.
"'The volatility around the market's policy risk is actually good for us from an investor point of view, so we encourage it,' Glossop told Reuters."
Glossop said that "the fund was investing in large hydro projects in China. The fund has a staff of 10 in London, with another employee on the ground in China originating deals." And the fund could grow to 250 million euros (US$350.3 million), but still needs to secure initial investment.
I'm unaware of anything like this starting up in the US, but president-elect Barack Obama's focus on a cap-and-trade program in the US could encourage development of such funds here.
CF Partners is a specialised environmental advisory and investments firm. The Firm’s strategic focus is on advisory, sales & trading coverage and fund management with a specialisation on environmental and global carbon products.
For more information: CF Partners Carbon Hedge Fund