London-based CF Partners (UK), an environmental finance firm specialising in carbon advisory and trading, is launching a carbon emissions hedge fund strategy.
The CF Carbon Fund adopts a relative value and arbitrage-based approach to trading carbon and the correlation of carbon with other global energy markets, seeking to capitalise on pricing inefficiencies and dislocations in these markets. The fund, which is targeting a 20 per cent return, has been running a shadow portfolio (which is up 6.67 per cent since June) ahead of opening up for investor subscription in November.
The carbon strategy is attracting interest from investors due to its low correlation to other asset classes, with -0.45 for the Dow Jones Industrial Average and 0.08 for the iTraxx credit index.
As a result of the arbitrage opportunities that exist in the markets in which it invests, the fund currently requires limited leverage and has minimal counterparty risk since the majority of the trades are carried out on exchanges.
Since its launch in 2006, CF Partners has become active in the carbon emissions market as an adviser to many compliance buyers of carbon credits, such as industrial companies and utilities. It also structures and trades OTC transactions among other buyers and traders of emission credits such as funds, banks and trading houses.
