Regardless of what the DOL decides, these new environmentally focused strategies represent the next incarnation of hedge fund focus on the environment, sources said.
That's because unlike hedge fund firms such as London-based TCI Fund Management Ltd., which takes an activist approach to engage with companies it invests in on environmental issues, these managers are making investment decisions based on winners and losers in the climate change stakes.
Unlike long-only managers that only bet on companies they think will be winners, a big part of the value proposition for these emerging strategies is that hedge fund managers also can produce alpha by shorting publicly traded companies with poor environmental track records or those that aren't transitioning fast enough to the new clean-energy economy, observers said.
"Shorting is consistent with hedge funds and tends to lower portfolio volatility. Most managers do it," said Robert E. Furdak, the New York-based CIO for ESG and chairman of the responsible investment committee for Man Group PLC.
"If your investment thesis is that poor (environmental) practices expose companies to risk, why not short those companies? Why not play the flip side and go long on companies that are carbon efficient?" he said, adding that investors can increase their exposure to environmental and other ESG signals by investing both long and short in a portfolio.
Man Group doesn't have a dedicated environmentally focused hedge fund strategy within the $108.3 billion it managed as of June 30, but does incorporate evaluation of environmental and other ESG concerns in investment management companywide, Mr. Furdak said.
"I think being able to invest on both the long and the short side makes hedge funds a great vehicle for environmental investing," said Daniel J. Elsberry, a senior managing director at Stamford, Conn.-based hedge funds-of-funds specialist K2 Advisors LLC, a subsidiary of Franklin Resources Inc., San Mateo, Calif.
Mr. Elsberry said there are not many dedicated environmental hedge funds to date, but he expects more will be launched.
K2 Advisors manages $10.4 billion in hedge funds-of-funds strategies.
New York-based UBS O'Connor launched its environmentally focused hedge fund strategy in June and relishes the opportunity to make money for investors on both long and short trades.
"We are one of the first managers to combine absolute-return investing with an environmental focus," said Kevin G. Russell, managing director of UBS Asset Management and CIO and head of UBS O'Connor.
"We are in the first sentence of the first paragraph of the story" of environmental hedge fund investment, Mr. Russell said. "We think environmental investment represents the biggest investment opportunity in the world" as climate change impacts corporate behavior, consumer preferences, government actions and industries.
Mr. Russell said environmental investing used to be focused on stock exclusion but hedge fund strategies "can harvest alpha on both the long and the short side."
Mr. Russell said UBS O'Connor's new strategy is attracting a lot of interest from institutions and other investors, but said he could not provide the size of the fund or investors.
UBS O'Connor managed $6.3 billion in hedge fund assets as of June 30.
Systematic macro manager Kepos Capital, New York, launched an environmentally focused hedge fund strategy in early August.
Mark Carhart, founding partner and CIO, who describes himself and his colleagues as "climate activists," said the new strategy is based on the thesis that "the world will have to change dramatically as part of the carbon transition away from fossil fuels. Except for coal and tar sands producers, most other industries have not begun the transition and will have to change fast to survive. Most people don't think the transition will happen as quickly as it will. This creates a lot of investment opportunities."
