How Altana Wealth’s new carbon futures hedge fund is riding the EU emissions “juggernaut”

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Carbon trading

Altana Wealth, the multi-strategy hedge fund led by former Trafalgar Asset Managers co-founder Lee Robinson, has launched a new carbon futures-focused strategy which aims to capitalise on the rising costs of carbon credits within the European Union.

With governments in developed nations, and particularly the EU, now fully committed to combating climate change and higher prices for carbon emissions, the Altana Carbon Futures Opportunity (ACFO) strategy, which launched earlier this month, will take directional positions on those rising prices.

Specifically, the strategy aims to provide investors with upside participation – with estimated multiple returns at 2-4 times unlevered – in the EU Carbon Emissions market, coupled with what Altana says is an “extremely improved downside risk profile” at around 30-50 per cent, by taking long positions in carbon futures whilst systematically managing tail risk.

Portfolio manager Callum Lee, who is leading the strategy, noted the European Commission’s goal is to drive the price of carbon credits high enough to trigger “behavioural change” among participating member states and companies. 

“This market effectively has been set up by the European Union as their primary policy instrument to reach their climate goals, which includes 55 per cent of 1990 levels by 2030, and to complete carbon neutrality by 2050,” Lee tells Hedgeweek. 

In addition to the inclusion of new industries in the scheme and more speculators coming to the market, the investment thesis is built around shorter-term catalysts arising out of two main drivers on the supply side. The first is the linear reduction of carbon credits every year to create a market shortage. The second is a stability reserve mechanism through which the EU can step in and remove credits from the market if it feels there are too many credits and prices are falling.

“It’s essentially structurally designed to create a supply demand imbalance forcing prices higher” Lee explains. “So as a hedge fund, we thought this was a really interesting opportunity that we could capitalise on – effectively it’s an artificial market created to drive prices higher and trigger behavioural change.”

The strategy, which has so far raised more than USD10 million in committed capital, utilises a tail-risk hedge fund strategy that Lee has overseen over the past three years, which specialises in dynamic knockout options, or DKOs.

“We structure the positions in such a way that it allows us to participate in the upside of a market without any bleed,” Lee continues. “You effectively get gap risk protection to the downside, whereby you’re only paying the premium for your optionality if and when the protection is needed. This payoff structure lends itself extremely well to the profile of the carbon market, where we think most of the risk is in the fat tail.”

“The EU’s intention is to create a nice steady line upwards in terms of price, so that it gets to a point where the opportunity cost of polluting is too high and it triggers behavioural change. For a lot of industries that’s around the EUR100-150 a ton level.”

Established in 2010 by hedge fund veteran Lee Robinson, London and Monaco-headquartered Altana today manages a range of ‘niche alpha’ strategies trading credit, event driven, systematic and cryptocurrencies, with around USD700 million of assets under management.

As sustainable investing continues to gather pace, and environmental, social and governance (ESG) indicators grow in importance in managers’ and investors’ portfolios, Altana sees this new strategy as a fresh spin on the evolving sustainability trend.

“We’re participating in a market mechanism that’s designed to put a fair price on pollution,” Lee observes. “The higher the price of this product, ie when we make more money, the more expensive it is to pollute. This is not necessarily a direct ESG product, but it is a play on the EU juggernaut whose momentum is heading towards the reduction of carbon in the environment.”

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Hugh Leask
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