Investing in a Growing, Changing Planet:
The Fund of Hedge Funds Opportunity
Since the integration of fossil fuels in the early 1800’s, world population and per capita productivity have grown exponentially, yielding a 100-fold increase in the size of the global economy. According to 97% of scientists, fossil fuel emissions over this period have increased the concentration of carbon dioxide in Earth’s atmosphere by 45%, contributing to six straight decades of global warming – with the 2000’s registering as the hottest decade on record and 2012 as the hottest year on record in the United States. Over the next 40 years, the global economy is projected to multiply an additional 6 times, from $70 trillion to $420 trillion in real product, as 2 billion more people are added to the planet and per capita wealth quadruples.
At the same time, natural resource availability is becoming strained, aging infrastructure is proving inadequate, and governments are tightening environmental standards, encouraging the transition to a cleaner economy. With exploding demand, volatile supply, and a changing regulatory landscape, inefficiencies and global investment opportunities abound. Already, high-profile portfolios are trending away from fossil fuels in favor of clean technology, as exhibited by Warren Buffet’s Berkshire Hathaway renewable energy acquisitions, and universities across America supporting Bill McKibben’s 350.org.
While natural resource prices gradually declined over the course of the 20th century, rising prices have reversed this trend in the single decade since. The marginal cost per oil well has doubled, mining discoveries have flattened despite quadrupled investment in exploration, and water scarcity has intensified due to overuse, pollution, and climate change. Yet, the rates of water and energy consumption are soaring, projected to increase 30-40% in the next 20 years, primarily due to growth in developing countries, specifically China and India.
As developing economies are expanding, developed economies will require renovation, forced by resource and climate risk to rebuild infrastructure with improved efficiency. In a 2013 report by the American Society of Civil Engineers, for instance, U.S. infrastructure earned a grade of “D+”. Dated bridges, dams, and levees threaten the safety of citizens each day, energy waste by an aging electrical grid leads to unnecessary emissions and consumer prices, while nuclear decommissioning and cleanup obligations total hundreds of billions of dollars. Between now and 2030, an estimated $57 trillion is needed in global infrastructure investment simply to keep up with economic growth, i.e. to preserve today’s sub-par standards for tomorrow’s growing population.
As the world grows bigger, greener, and more connected, vast sums of wealth will change hands. New companies will rise, old ones will fall, and long/short investors will be positioned to capitalize in both directions. Of the 30 Dow Jones Industrial Index companies in 1982, for instance, only 11 remain in the index today, many failed due to technological change or the globalization of financial markets; as we look ahead to the coming decades, corporate reconstitution is sure to continue. For investors, opportunities span the risk-return spectrum.
Conservative investments include infrastructure companies that own and operate long-lived assets responsible for essential goods and services, e.g. airports, seaports, pipelines, waste facilities, and communication towers. These companies benefit from (a) monopolistic market positions due to substantial economies of scale and (b) stable, inflation-linked revenue due to inelastic demand and regulatory protection. For investors, they offer attractive, non-correlated returns with low volatility, stable dividend yields, resilience to economic downturns, and a long-term hedge against inflation.
Riskier investments include disruptive technology companies in infrastructure sub-sectors such as renewable power, electric vehicles, energy storage, smart grid, desalination, and next generation telecom. Due to the combination of intrinsic unpredictability, variable regulation, and related information asymmetries, growth in these sectors is likely to be accompanied by volatility, mispriced assets, and a wealth of related losers. To capitalize, accredited investors should seek industry specialists with an absolute return approach.
At TerraVerde Capital, we believe that a diversified portfolio of hedge funds is uniquely positioned to minimize risk, capitalize on short positions, and achieve positive returns regardless of market direction. Our long positions include both emerging companies and established businesses with high barriers to entry, while our short positions target companies reliant on dated technology or aging business models. As the world continues to grow and transform, our portfolio objective is to protect and grow capital in the face of market and operational volatility.
For the full-length report, please contact:
Richard Bookbinder or Tyler Jenks at
TerraVerde Capital Management LLC is a New York based investment management firm. Our portfolio approach focuses on global trends in population growth, resource depletion, and climate change to generate a portfolio of diversified hedge funds. TerraVerde Capital Partners LP was launched in July 2009 to specialize in clean infrastructure investments including power, water, agriculture, transportation, telecom, and waste management. This focused approach allows accredited investors to participate in the paradigm shift to sustainable infrastructure, with its many winners and losers.