The Hedgeweek Interview: James Hulse, Cumulus Climate Fund: "The US election will change the landscape for alternative energy companies"
James Hulse, fund manager of the newly-launched Cumulus Climate Fund, which seeks to profit from the financial impact of climate change, says post-Bali negotiations could dramatically speed up carbon dioxide emissions regulations around the world.
HW: What is the background to your company and fund?
JH: Cumulus was founded in 2005 by Peter Brewer, chief investment officer of Cumulus and manager of the Cumulus Weather Fund, myself as head of equities and Joaquin Narro as head of energy commodities.
The Cumulus Weather Fund was launched in October 2005, trading weather derivatives, energy commodities and equities from a weather perspective. This was followed by the Cumulus Energy Fund in October 2006, a carve-out of the energy commodity strategy in the Cumulus Weather Fund.
The Cumulus Weather Fund now has USD140m under management and the Cumulus Energy Fund (which is closed to new investors) has more than USD100m. The Cumulus Climate Fund was launched this month and currently has USD10m under management.
HW: Who are your service providers?
JH: Our prime broker is Goldman Sachs, the administrator is PFPC, our accountants are Grant Thornton, and our legal advisors are Walkers in the Cayman Islands and Herrick Feinstein in the US.
HW: What is the profile of your client base?
JH: The profile of current Cumulus investors covers the full range of high net worth individuals, pension funds, funds of funds and family offices worldwide, which we will continue to target for the Cumulus Climate Fund.
HW: What is the investment process of your fund?
JH: The Cumulus Climate Fund is a global long/short equity fund that seeks to profit from the financial impact of climate change. It trades from a fundamental perspective but focuses on specific catalysts.
The fund will run between 25 and 35 positions, generally split equally between fundamental long and short positions. It will generally seek to be market neutral but with the ability to run up to 25 percent net long or short exposure if appropriate.
HW: How do you generate ideas for your fund?
JH: We identify direct climate change impact using our proven proprietary weather-sensitivity models, original research from scientists on the fund's advisory panel, and the Cumulus team's weather-driven commodity trading experience.
We identify the legislative, technology and social responses via detailed insights from the advisory panel, original research from the Cumulus team, and the team's comprehensive knowledge of carbon emissions regulations and incentives.
HW: What is your approach to managing risk?
JH: We generate returns and manage risk through active stock selection. We diversify the portfolio across sectors, themes, market capitalisations, countries and risk profiles of the individual stocks.
The short positions enable the fund to take advantage of overvaluations as well as to manage sector risk. We hedge any residual risk with pairs trades, options, sector baskets and index futures.
HW: Has your performance been in line with expectations?
JH: The fund has 17 months of paper trading track record showing consistent annualised returns in excess of 15 per cent on volatility of around 9 per cent. We expect performance of 15 to 20 per cent as we have increased the resources available to the fund by additional hires since the start of the paper trading.
HW: What opportunities are you looking at right now?
JH: We see interesting opportunities in the agriculture space, especially as many stocks are in traditional sectors such as cyclical industrials and chemicals and are affected by concerns about the US economy, whereas we think their profits are much more highly correlated to the agriculture markets.
HW: What events do you see in your sector in the year ahead?
JH: The US election and the Liebermann Warner Climate Security Act will both change the landscape for alternative energy companies and carbon dioxide emitters in the US. We are closely watching progress in the post-Bali negotiations, which could dramatically speed up emissions regulations around the world.
HW: How will these developments impact your own portfolio?
JH: There will clearly be a sizeable impact on industries and individual companies from increased government regulation and incentives, and we hope to be able to position ourselves appropriately ahead of the rest of the market, using insights from our advisory panel of world-class experts, together with our proven ability to translate macro events into single stock opportunities.
HW: What differentiates you from other managers in your sector?
JH: We are not a traditional long/short equity group interested in moving into the alternative energy space, but rather a weather- and climate-focused group moving deeper into the equity space.
We have five other teams in the Cumulus offices - meteorology, weather derivatives, energy commodities, carbon dioxide trading and agricultural commodities - as well as our advisory panel, so we are constantly receiving information from different but related markets that we can turn into unique equity ideas.
HW: Do you have any plans for other product launches in the near future?
JH: We plan to launch an agricultural commodity fund in April 2008.
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