Hedge fund managers know how to profit from crises

Energy may be the topic on everyone’s mind, but the consequences of the current crisis are far deeper and long-lasting. Hedge funds are particularly well placed to make the best of the coming seismic shake-up of our economic models. The following is a review of the main high-potential themes for the next few years and the winning strategies for profiting from them.

The energy dependence of many developed countries on Russia, and the supply chain issues that have severely affected numerous sectors, are a legitimate cause for concern for governments, companies and consumers. These two factors are above all greatly undermining our economic systems, however, which is therefore also reshuffling the deck in the investment sphere. Given the changes on the horizon, hedge fund managers seem to be in the best position to capitalise on these new themes due to the wide variety of strategies that they offer.

A new priority: decarbonisation

Last summer’s repeated heat waves have boosted people’s general awareness of the situation’s urgency. Governments worldwide have responded by introducing massively ambitious plans for the decarbonisation of their economies, aimed at achieving carbon neutrality by 2050. In the US, for instance, the Inflation Reduction Act provides for a USD 400 billion budget to combat global warming. In Europe, the Fit for 55 (EUR 3.7 trillion) programme, and the REPowerEU energy independence plan, have also been added to the Green Deal, of a total amount of EUR 7 trillion.

In practical terms, this will result in major electrification projects to increase the share of electricity in the energy mix. The renewable energy and green hydrogen production sectors will clearly be flying high. Very large scale infrastructure is also needed, from component and battery production plants to charging station networks for electric vehicles.

Several options are available to investors who wish to bet on this theme, namely long-short equity strategies of course, and also macro funds and commodity specialists, which are able to position themselves in the strategic materials necessary for the generation and transmission of electricity, and the production of batteries, such as copper, aluminium, lithium and nickel. It is worth noting in this regard that, since January 2014, long-short managers investing in energy have largely outperformed managers who don’t (+173.3% versus +112.5%[1]). Lastly, there are several funds that specialise in trading in carbon emission quotas. It must be said that institutional investors globally have very limited positions in these themes, as commodities are not liked. We are therefore right at the start of a reallocation to this sector. Managers active in commodities and energy include KLI, Westbeck, Andurand and Soroban. On the list of Global Macro managers able to invest in every asset class, and commodities specifically, are Caxton, Gemsstock, Rokos and Kirkoswald.

Energy independence at any cost

By turning off its gas and oil taps, Russian has forced European countries, and Germany especially, to seriously examine their consciences, by starkly underlining the extent of their dependence on this totalitarian regime. This has resulted in a general review of their sources of supply and a firm political will to achieve greater energy security and independence. The current crisis has also produced a shift in opinion in favour of nuclear energy, which is now seen as a lesser evil, from the point of view of both autonomy (if we overlook the issue of uranium procurement) and greenhouse gas emissions. Nuclear power is a relatively clean source of energy, if the problem of waste is set aside (although we know how to store it if it can’t be processed). In our multi-polar world, commodities are becoming more strategically important than ever.

The end of globalisation

Another unexpected consequence of the COVID-19 pandemic and the energy crisis has undoubtedly been the swing away from globalisation, a phenomenon that was thought to be irreversible. Serious bottlenecks, breaks in supply chains and the increasingly expansionary attitude of China, which is no longer satisfied with being the world’s factory, have shone a light on the limitations of the economic model that has prevailed for the last 50 years. Accordingly, many governments, as well as companies of every size, have taken steps to relocate their production operations, or to bring their sources of supply and their suppliers closer. The new Inflation Reduction Act, for instance, includes numerous tax incentives to encourage onshoring and local production. Once again, hedge fund managers are the most able to benefit from this new key trend thanks to their responsiveness, their ability to bet on both upturns and downturns, and their capacity to invest in currencies or derivatives. Increased volatility is to be expected over the next few years and major differences between sectors. Active management should therefore take precedence over index-linked strategies.

[1] Performance of the managers included in Haussmann Holdings from 01.2014 to 08.2022

 

 

 

 

 

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