Overview of Carbon Hedge Funds

The flexibility of the hedge fund structure is the central reason these investment vehicles are so popular.  The flexibility allows funds to specialize on certain investment sectors or strategies, and they can move quickly to the hot areas of the markets.  One of the hot areas of the markets is the movement toward green investments and strategies.  With this increased focus on energy and related areas, Carbon Hedge Funds have become a popular investment vehicle to focus on “carbon” as a new asset class.  This article will overview the two common carbon hedge fund strategies and will also provide resources for more information on carbon trading and other investments.  Please contact us if you have any questions on the information below or if you would like more information on starting a carbon hedge fund.

Carbon Hedge Fund Trading Strategies

There are two central trading strategies which are emerging to profit from the increased attention on carbon: (1) investing in and trading the commodity and (2) investing in companies which are focused on carbon emissions in some way.

Trading Carbon the Commodity

Generally this will involve trading carbon emissions on a marketplace.  Groups like the NYMEX have created a platform for trading carbon emissions.  It is expected that other groups will enter this marketplace in the future.

Investment in Companies Dealing with Energy and Carbon

Like many hedge funds which focus on a specific sector (say manufacturing or financials), carboin hedge funds might focus on the energy sector in general and in companies which focus on carbon trading in some way.  It is expected that in the short term that most of these companies will be small and mid-cap stocks.

Carbon Hedge Fund Regulatory Issues

Depending on the carbon strategy utilized in the hedge fund, the hedge fund manager may need to examine certain regulatory issues.  Specifically, the hedge fund manager may need to be registered as a commodity pool operator or as an investment advisor with the manager’s state securities commission.  Managers should discuss these issues with their hedge fund formation attorney.

Carbon Hedge Fund Offering Documents

Like other hedge funds, carbon hedge funds will need to have offering documents drafted by a hedge fund attorney.  The central issues which will be discussed are trading strategy, valuation, withdrawal/ redemption provisions, and fees.

With regard to valuation, there will need to be clear mechanics in the offering documents to value the assets in the hedge fund.  If the assets are traded on an exchange (such as the Nymex Green Exchange with regard to carbon emissions), the manner of valuation should be fairly straightforward.  If the assets are not traded on an exchange, the manager may want to think about instituting a side pocket structure or going with a private equity fund structure. Securities valuations will follow generally accepted industry practices.

With regard to fees, a carbon hedge fund typically will have a similar fee structure as a traditional hedge fund.  Generally the fees will include a management fee of 1% or 2% and a performance fee of 20% (for example please see example 1, example 2 and example 3.

Other important carbon hedge fund provisions to discuss with your attorney include: the lock-up provision, the gate provision, the minimum investment amount.  While many carbon hedge funds are established as U.S. entities, carbon funds can also be established as offshore hedge funds and offshore segregated portfolio companies.

For more information please see our article Recommended Articles for Start Up Hedge Fund Managers.

Other Sources Of Information on Carbon Trading

Nymex Green Exchange
http://nymex.greenfutures.com/

Carbon Emission Trading Firm
http://www.firstclimate.com/

Carbon Markets North America 2009 Miami, 15 & 16 January
http://www.environmental-finance.com/conferences/2009/Miami09/intro.htm

Key benefits of attending:

• Learn from 30+ forward-thinking industry experts how current emissions trading systems are creating business opportunities, fostering innovation, and influencing global finance.
• Hear a keynote address from the Florida Governor’s Office on the US and the State of Florida’s carbon policies and market activities in the context of global action on climate change
• NEW! Highly interactive format – including many panel discussions and extended Q & A sessions
• Expanded carbon-focused agenda: Four themes will be covered comprehensively – Carbon Policy, Carbon Trading & Investments, Carbon Finance & Project Development, Carbon & Other Markets
• Superb networking: Meet and do business with the key players and decision makers in the global carbon markets
• Workshop: Take advantage of reduced rates to attend the one-day
Introduction to Emissions Trading workshop on January 14 presented by The Environmental Markets Association (EMA)