Environmental finance firm CF Partners is to start a hedge fund targeting the carbon market. Due to start by the end of January, the fund will exploit the volatility in the carbon markets to make profits, say executives.
The London-based company will run the hedge fund using arbitrage trading, which exploits mismatches in pricing. This will help it to operate with limited leverage, so that extensive funds do not have to be borrowed to amplify returns. Arbitrage trading in carbon could involve finding pricing disparities between two types of carbon credit, for example: the European Union Allowance credits traded under the European Trading System and the Certified Emissions Reduction credits provided by the Clean Development Mechanism.
Company partner Simon Glossop believes that carbon credits have matured to the point where they can be traded effectively as financial assets in their own right, rather than simply as a necessary tool for compliance purposes.
"There has been a huge expansion in terms of transaction volumes on these exchanges, which is an indication of how the market has changed," he said.
Glossop also hopes to mix traditional “long” approaches to carbon trading with a “short” approach, which he said has been far less common in the carbon markets to date. Short selling involves selling financial instruments before they are owned to capitalise on falling prices.
Other techniques include trading other energy commodities based on the firm's knowledge of carbon. For example, if coal costs fall, then the firm may infer that plant emissions will rise, which will have an effect on utilities' carbon hedging strategies. If the cost of power is seen to be less than the combined costs of power and carbon, the fund may decide to buy power and short coal and carbon.
Glossop said that companies forced to purchase carbon for compliance purposes may benefit from participation in the fund in addition to institutional investors.
"Because the fund is a trading relative value arbitrage fund, it will give investors an advantage in terms of information about what's going on in the marketplace," he concluded. "For some of the utilities and other players in the marketplace, it will be advantageous to see what's going on."
Group of investors with assets worth more than $13 trillion call for robust Copenhagen deal 17 Sep 2009
But poor practices could lead to more emissions than coal 16 Apr 2009
Vague language and limited low carbon commitments fail to impress green business campaigners 03 Apr 2009
New report claims clean coal technologies could support up to 60,000 jobs and generate £4bn a year 17 Jun 2009
Report from the Institution of Civil Engineers calls for the UK government to set the framework for industry to develop and implement carbon capture and storage technology 27 Oct 2009
Desert tortoise fears allayed? 19 Mar 2010
Cameron presents pre-election energy policy, promising greater investment certainty for low-carbon projects, green loans for households, and streamlining of planning system 19 Mar 2010
Joint statement from carbon exchange and Hungarian government aims to restore confidence in CER market 19 Mar 2010
More news
From climate change contrarians to the "KitKatastrophe" of Nestle's palm oil policy, we look at the best the green web has to offer this week 19 Mar 2010
"It needs the political enthusiasm that was behind the war on terror after 9/11" 19 Mar 2010
From the government's plans for a marine energy revolution to John Lewis' proposals for an off-grid supermarket 19 Mar 2010 More in-depth
Post your comment
Send an email to the Business Green editor at feedback@businessgreen.com
