The greening of hedge funds
Swiss-based RMF Investment Management has launched what it believes to be the first fund of hedge funds to purely invest in environment-related industries and strategies.
The RMF Environmental Opportunities Fund invests in carbon and emissions trading, water resources and infrastructure, clean technology and renewable energy.
"Our parent company, Man Investments, has a strong interest in environmental topics and wanted to create an environmental investment product," says Sven Lidén, member of the management committee at RMF. "But transparency and liquidity is a problem for many new markets. However, new markets provide an ideal environment for hedge funds to operate in."
Since its launch on 1 September, the registered fund, which is open to institutional investors in most countries with the exception of the US - although a US version is under consideration - has aroused considerable interest among pension funds and family offices in Switzerland, Scandinavia, the Netherlands and Japan, Lidén says.
But he continues: "It is very difficult to bring an environmental concept to the hedge fund stage because it is difficult to define, for example, whether a carbon trader is good or bad for the environment. He helps the market's liquidity, which is probably good for the environment, but it is not that clear-cut. Against a backdrop of a booming fund-of-hedge-funds industry, we have seen a lot of interest for the fund, as many investors who want to invest in funds of hedge funds have so far been unable to do so due to the social responsible investment [SRI] issues associated with normal hedge funds."
The fund targets returns of LIBOR +8-10%. Lidén explains that this is due to the concentration of the fund, which currently only comprises six managers.
"It is the absolute minimum to launch a product," he says. "For the future, we plan to identify more managers and bring them into the product. This will definitely reduce volatility and mitigate at least part of the risk. However, as carbon trading is a very young industry, some part of the risk is unavoidable. Consequently, the fund is more of a satellite product and a return enhancer."
He adds: "RMF's new alternatives group will continue to manage the product until the portfolio reaches some maturity. Long-term we aim for 12-15 managers with our quality standards and return targets, which offer strategic and geographical diversification from the other six funds."
The fund's other 12-month target is a sub-sector investment split of 50% carbon trading and 50% water resources and infrastructure, clean technology and renewable energy, with the last three strategies tilting towards the long-short area of hedge funds. Currently, the fund invests about 25% in carbon trading and 75% in the other three strategies.
Lidén says this is due to the carbon market still being in the early stages. But he is confident that, driven by the Kyoto Protocol's commitment period of 2008-12, the market will take off next year and as a result create more investment capacity.
"We are very bullish on carbon trading because it is a new market and good traders in these new markets tend to have very good returns," he says. "But its diversification effects are even more important as the other five managers are all classified as equity hedged."
"For pension funds that have already adopted an SRI approach for traditional investments, an environmental fund of hedge funds is a good idea, because then they can also apply SRI to hedge funds," says Fabrizio Ammirati, managing director and senior consultant at Swiss-based Kieger Consulting. "But the problem is that the investment universe is currently very limited by the underlyings, so you have to diversify with other investments."