For some people the terms "green" and "investing" are as diametrically opposed as Democrat and Republican or oil and water. Green denotes tree-hugging hippies and notions of starry-eyed idealism. Investing, on the other hand, is the heart and soul of hard-edged capitalism, and nowhere more so than in the hedge fund space.
Like many generalizations this one differs from reality. Today's green investors may want to change the world, but they're going to use market forces to do it and want to make some money in the process.
A case in point is TerraVerde Capital Partners, a hedge fund of funds with a green orientation. It was launched on July 1 of this year and is managed by Richard Bookbinder, managing member of Bookbinder Capital Management and a hedge fund veteran with more than a decade of experience running money.
Bookbinder says the idea for TerraVerde grew out of the ongoing due diligence that he does for his three other hedge funds. It's interesting to note that for Bookbinder this is about green as a viable investment theme, not a crusade to save the world, although that's a nice side effect. "We started looking at some things in the green space a couple of years ago," he explains. "We thought there were a lot of interesting things taking place in the broadly defined environmental space, but specifically for us as we defined the green space."
Writing the Definitions
Defining common terms like "green" can be important because not everyone uses them to mean the same thing.
"As we have put together our official legal documents as well as the marketing stuff," reports Bookbinder, "we had to come up with a definition, and for us it's very simple--investing in green strategies is investing with those managers that serve to reduce the carbon footprint."
Bookbinder says he's identified and either met or spoken by phone with more than 100 managers globally that focus on clean energy, clean tech, water, solar and wind power, and other renewable energy sources, but limits the number of managers in the portfolio at any one time to between 15 and 20. "We also allocate money to managers that are involved in carbon--that's carbon arbitrage, carbon trading, carbon project finance, and the other related strategies."
The managers in the TerraVerde fund follow a universe of about 1,000 companies, and Bookbinder says the stocks they trade in are about one-third each in the U.S., Europe, and Asia/Australia. "Many of the financial advisors and family office and high-net-worth investors that we deal with look for portfolio diversification and a lot of the clean energy, clean technology stocks are very geographically diversified," he explains. "What we're trying to do is to provide a product in a hedge fund format that will give diversification globally."
Getting Green With Green
Although the fund has only been open for a few months, Bookbinder's due diligence and research was going on for about two years prior to that. He says there was a number of developments during that time that indicated to him that this would be a viable theme with long-term potential. One was that during the long Presidential campaign season, "the leading candidates only had one thing they agreed on, other than how American and patriotic they are, and that was the environment and that they wanted to do something about it." Another was the seesawing price of crude oil.
"We've spent an extended period of time in understanding what's taking place in the whole supply chain, the whole value chain of green and clean investing," Bookbinder explains. His conversations have been with people in the political arena as well as those playing in the private equity and venture capital fields.
Another thing that helped convince him was that he saw a shift in investor philosophy toward climate change taking place as he talked with advisors, high-net-worth individuals, and family offices. "They're very keenly aware of the issue of climate change and global warming and want to do something, and this is a way to participate," he says of his own fund of funds. "This is a way to make money in the equity portion on longs as well as to make money on shorts from companies that may obviously have bad product introduction, bad management teams, or just simply don't have enough funding."
Then there's alternative energy and green stimulus money. "In the last nine to 10 months or so, global governments have spent about $2.7 trillion on stimulus packages," Bookbinder notes. "Of the total stimulus about $500 billion globally has gone into clean tech, clean energy, and renewable energy. That money is now starting to make its way, in the case of the U.S., from the Department of Energy into the hands of entrepreneurs who are developing some sort of a process, a product or a service to reduce carbon footprints." (See Green Energy Gets Green Light sidebar.)
"We think these are all reasons why people should be looking at this strategy as one in which they can make money," he says.
Not for Everyone
Of course, hedge funds are not for most of the average advisor's clients. TerraVerde requires a minimum investment of $1 million and has a 1% management fee and a 10% performance fee. For those who want to add some green to their portfolios, Bookbinder notes that there are numerous mutual funds and ETFs with compatible strategies. "One of the indices that we follow very closely is the Wilderhill Clean Energy Index (ECO)," he reveals. (The PowerShares WilderHill Clean Energy Portfolio (PBW) is an ETF that seeks to mirror the performance of the index. There are also futures on the index offered by the Chicago Climate Futures Exchange.)
From Bookbinder's perspective, the potential to make money from green investing is huge. He cites reports that the economy is starting to improve and that industrial production is starting to pick up. He sees the economies of China and India as remaining strong in the coming years.
"We believe that over the next 10 to 20 years, there are going to be increasing shortages of water," he adds, touching on another part of TerraVerde's strategy. "The reason is simple--global populations are growing. People need water. They might not need alcohol and they might not necessarily need ethanol or gasoline, there might be substitutes for that, but they do need water. With growing populations we think that our strategy is well positioned to be able to participate. Water is a critical ingredient of what we invest in."
Just like anyone else that talks about climate change or global warming, Bookbinder has run into his share of skeptics. He says he tells them, "I'm not a scientist, I'm a financial services professional, but there are an awful lot of strange things that are going on out there in the environment. What I do know is a) water, they don't make it anymore, b) we're running out of space, and c) eventually we're going to run out of fossil fuels, so it's time to step up to the plate."
While interest in the green sector continues to grow, Bookbinder thinks we ain't seen nothin' yet. "I like to think of it as the newest of the emerging markets," he says using a baseball analogy to explain. "We've asked several of our managers and other people in the hedge fund space, 'Where are we, in the top of the first or the bottom of the first?' The answer from several is simple, 'We're still filling out the scorecard.' We think that it's still very early on in this to participate. These problems aren't going away. Period."