Cleantech venture capital

Systematic Absolute Return launches green fund of funds (25% fund exposure in Asia)

Systematic Absolute Return (SAR), a Swiss-based fund of hedge funds, is launching its SAR Environment Fund in January 2008. Approximately one quarter of the underlying hedge funds are based in Asia, and overall exposure for Asian investments will be around 50%.

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Even though environment-focused shares have performed well in the last two years, SAR reckons that the environment is not a short term play, but the most important ongoing investment theme for future decades. In Asia their sales will be handled by the Hong Kong-based team of Chris Stockton, Greg Varian and Daryl Evans.

For this fund of funds, SAR is targeting 15% annualized returns with volatility at sub-7.5%. The annualized standard deviation of their model portfolio has been 3.9% with compounded returns of 24.9%. Fees for the fund are 2% and 20%, which SAR agrees may be regarded as expensive for a fund of hedge funds, but its managers are confident that it will represent value for money.

Target size of the fund is $500 million and redemptions are available quarterly on 90 days notice.

“We will invest in a mix of strategies that are uncorrelated as they all have different return drivers, says Arne Schmidt, SAR’s managing partner and CIO in Switzerland. “Most Asian hedge funds that fulfill our screening criteria are long/short equity funds which invest in clean technology, renewable energy and the water sector. Others are active in carbon and poverty reduction projects.”

SAR will apply a portfolio overlay to hedge excessive directional exposure and also the managers will be able to short the market.

Denying global warming nowadays is almost as heretical as denying the holocaust. Nevertheless, as the man in the street has been brainwashed by the tsunami of propaganda, the industry for socially responsible investing (SRI) has grown up. Currently assets under management in that sector stand at US$ 4 trillion.

Whether the science is correct or not, there is money to be made chasing the bull-run in environmental-themed stocks and shorting the polluters. Yet, until recently, the majority of those investment vehicles were long-only mutual funds. In the last year, hedge funds have entered the space in greater numbers. SAR’s universe currently numbers approximately 70 funds.

SAR says it will avoid pseudo-green sectors such as clean coal and nuclear energy as well as ostensibly socially and environmentally responsible investments which have a negative impact in other ways, such as sourcing biofuels from maize, soya and sugar cane, on the rationale that they are also food crops and therefore SAR infers that using them to make fuel simply adds to rising food prices.

In the environment-market now, there are numerous managers jumping on the bandwagon and promoting themed funds and listed private equity vehicles. How then does this fund approach them? “SAR has encountered several managers who have very broad definitions as to what constitutes a green investment,” says Arne Schmidt. “They invest in companies such as Toyota or John Deere arguing that a certain proportion of the operations of these companies are in cleantech or that they are greener than their peers.”

SAR was established in 2001 and its two existing funds have assets under management of $150 million.

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