New carbon and energy policies, regulations and initiatives are expected to drive markets in the coming year, resulting both in rising risk and opportunity for investors. And, as consolidation looms in the hedge fund industry, specialised, alpha-generating strategies can be expected to draw higher investor interest.
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New carbon and energy policies, regulations and initiatives are expected to drive markets in the coming year, resulting both in rising risk and opportunity for investors. And, as consolidation looms in the hedge fund industry, specialised, alpha-generating strategies can be expected to draw higher investor interest.
Several new policies are on the horizon such as the Inflation Reduction Act (IRA) and new Carbon ETS Systems in the United States, Fit for 55 and RePower in Europe. Regulations like the SEC ESG Disclosure and industry initiatives such as the In Voluntary Carbon in Asia and the Middle East are also underway.
“These laws and initiatives may influence asset managers and investors,” comments Carlos Arcila Barrera, CFA, CAIA Founder and CIO, Sigma Advanced Capital Management, “they could pose a risk to businesses that must adapt to new regulations. However, they can also provide numerous opportunities to reform and transform their businesses and investments in order to accommodate and contribute to this transition.”
Sigma has noticed that investors are showing a growing interest in capitalising on emerging opportunities in ESG and energy transition, as a result of these reforms and new policies.
In outlining specific opportunities, Arcila Barrera says: “In this new macroeconomic environment, we anticipate that a more tactical and active portfolio strategy will offer the best opportunities for several asset classes. Nevertheless, we anticipate that commodities and the energy transition -particularly carbon markets – will be among the most significant conversation topics and opportunities in 2023.”
For example, the reopening in China and a rise in demand from India could result in an increase in commodity prices. “Our opinion is that commodities are attractive for multi-asset portfolios on both an absolute and a hedging basis,” adds Arcila Barrera.
In Europe, the passing of the Fit for 55 package, would result in a more aggressive reduction in emissions by 2030, leading to a scarcity of carbon credits and a bullish case for the European compliance carbon market. Furthermore, in order to reduce reliance on Russian fuel while meeting climate goals, Europe is rapidly reshaping its energy sources and consumption. Clean energy investment is increasing in response, with the European Union’s (EU) REPowerEU plan committing nearly €300 billion in investment by 2030 to help reduce the bloc’s reliance on Russian fossil fuels. The United States is getting in on the act as well, with Washington and New York developing their own Emission Trading Systems, and California considering a more aggressive emission reduction, supporting the growth of carbon allowances, and the Inflation Reduction Act including tax credits and other financial incentives aimed at making clean energy more accessible.
“After a year of traditional asset reallocation and the start of a new regime, investors are focusing on alternative investments that have no correlation with traditional assets, offer inflation protection, capitalize on the current macroeconomic environment, and maintain liquidity. Managed futures (CTAs) strategies could provide these benefits to investor portfolios, and could be one of the primary demand drivers for this year,” Arcila Barrera notes.
Although Sigma believes hedge funds should be incorporated in investor portfolios throughout periods of low and high volatility, as well as in between, the firm anticipates increasing industry consolidation. “This means demand will come from hedge funds that can effectively manage risk and drawdown while displaying actual alpha, with a stronger appetite for multi-strategy large hedge funds that can deploy substantial capital and have diversified strategies, and niche strategies which can extract idiosyncratic alpha in their specialised markets,” Arcila Barrera concludes.
Carlos Arcila Barrera, CFA, CAIA, SCR, founder and chief investment officer, Sigma Advance Capital Management – Carlos is the founder and Chief Investment Officer of Sigma Advanced Capital Management, a Chicago-based hedge fund specializing in absolute return strategies with a focus on commodity and carbon markets while seeking positive climate and social impact by supporting projects and initiatives aligned with Global Sustainable Development.
