Fri, 31/10/2008 - 05:59
Simon Glossop,partner and chief investment officer at CF Partners, a London-based
environmental finance firm specialising in carbon advisory and trading,
explains why the firm is launching a carbon emissions hedge fund in
November to exploit pricing inefficiencies and dislocations in carbon
HW: What is the background to your company and fund?
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 carbon funds, banks and trading houses.
the arbitrage opportunities that we see through the advisory business,
we are in the process of launching the CF Carbon Fund to capitalise on
pricing inefficiencies and dislocations in the carbon markets. The fund
adopts a relative value and arbitrage-based approach to trading carbon
and other related global energy markets.
The fund's principals are myself, Jonathan Navon and Thomas Rassmuson, and the portfolio manager is Tony Walker.
HW: Who are your service providers?
Our fund administrator is Fortis and our law firm is Katten Muchin
Rosenman Cornish. We also have a trading relationship for OTC
derivatives and futures and options with Deutsche Bank.
HW: What is the profile of your targeted client base?
We are targeting sophisticated institutional investors that are willing
to look at new markets and strategies, which require more analysis and
work, but in return they expect to be rewarded with non-correlated
HW: What is the investment process of your fund?
We have a structured investment process, which is scalable. An
investment committee led by myself as chief investment officer and
staffed by senior members of the investment manager is responsible for
setting the investment guidelines and discussing themes for the fund.
investment committee reviews strategy and monitors performance on a
regular basis. Every investment opportunity goes through a rigorous
process and must have an expected risk/return that fits the fund on an
individual basis but also from an overall portfolio perspective and fit.
HW: How do you generate ideas for your fund?
Investment generation is based on fundamental research, a proprietary
carbon supply/demand model, internal models and a well-developed
network. Given the firm's position in the carbon market through its
advisory and brokerage businesses, it provides the fund management
business with internal research and insight.
HW: What is your approach to managing risk?
We have a dedicated risk framework and engine combined with a
disciplined trading approach based on significant experience. Our
commitment to risk management is that the chief risk officer is a
senior partner of the firm not involved on the investment side. A
separate risk committee reviews the portfolio regularly and there are
well-documented processes for assessing and managing risk.
HW: Has your shadow performance been as per expectations? Do you expect your performance or style to change going forward?
Since June 2, our shadow portfolio has returned 6.58 per cent, which
are 21 per cent annualised. Our style will not change significantly.
Given the opportunity set in the carbon market, the strategy has not
employed leverage to date and does not anticipate that changing in the
HW: What opportunities are you looking at right now?
The CF Carbon Fund is well positioned for investments given the recent
volatility in the global markets. The shadow portfolio is currently
returning positive returns since trading commenced despite the recent
market instability. Carbon is an uncorrelated to equities (-0.43 to the
Dow Jones Industrial Average) and fixed-income markets (+0.09 to
Given the current arbitrage and trading opportunities
in the carbon market, the fund can generate positive returns without
employing leverage. Currently a majority of trades are transacted on
exchanges such as ICE, Nordpool, Nymex and EEX, minimising credit
HW: What events do you expect to see in your sector in the year ahead?
The investment strategy is based on structural inefficiencies that we
believe exist as a result of companies trying to become more efficient
with their resources in a carbon-constrained world, and governments
balancing the long-term effects of a growing global population
consumption with a declining amount of non-renewable resources.
inefficiencies are a result of lack of clarity with respect to climate
change policy, regulation and obligations, companies unable to adjust
to new carbon requirements or doing so inefficiently, and a lack of
market expertise and transparency available for investors and those who
are obliged to comply with policy. It will take some time for these
primary inefficiencies to be adequately accounted for by the majority
of the companies that the carbon policy is affecting.
will continue to focus on new and emerging sectors in the carbon
markets offering the most favourable risk/reward profiles and hence the
greatest potential for profitability.
HW: How will these developments impact on your own portfolio?
SG: Increased volatility will lead to greater returns for the trading fund, which is long/short.
HW: What differentiates you from other managers in your sector?
The majority of funds established to date specifically to look at
carbon have been accumulators or aggregators, with a strategy to buy
and develop carbon credits through early-stage investments and
involvement in projects, and to seek to sell the carbon credits at a
later date at a more expensive valuation. In effect these funds are
This fund is unique in that it seeks actively to
trade carbon from a relative value and arbitrage perspective instead of
being purely directional. The firm has a strong network of contacts
through trading and advisory activity to ensure a total overview and
insight to the supply and demand dynamics.
HW: Do you have any plans for other product launches in the near future?
SG: Future fund launches will be a water fund and an environmental long/short equity fund.