Alternative managers know how to use crises

If energy is at the center of all concerns, the consequences of the current crisis are deeper and more lasting. Hedge funds are particularly well placed to make the most of the profound upheavals our economic models will experience. An overview of the key promising topics of the coming years and winning strategies to capitalize on them.

The energy dependence of large parts of the developed world on Russia and the supply chain problems that seriously affect many sectors are legitimate concerns for governments, companies and consumers. But above all, these two factors seriously challenge our economic systems and ultimately change the cards in the field of investment as well. Facing these impending changes, alternative managers appear to be in the best position to remove the chestnuts from the fire of these new topics, thanks to the variety of strategies they offer.

A new priority: decarbonisation

Last summer’s repeated heat waves accelerated the general awareness of the urgency of the situation. Faced with global warming, governments around the world have embarked on ambitious plans to decarbonize their economies to achieve carbon neutrality by 2050. In fact, the IRA law in the US provides a $400 billion budget for the global fight. warming up To the Green Deal, which totals €7 trillion in Europe, we have added the “fit-55” program (€3.7 trillion) and the energy independence plan REPowerEU.

Specifically, this translates into large electrification projects to increase the share of electricity in the energy mix. Of course, the renewable energy sector and green hydrogen production will have wind in their sails. In addition, a large infrastructure is required, whether in factories producing components and batteries, or in networks of charging stations for electric cars.

There are several options for the investor to play this theme: Of course, long-term capital strategies, but also macro funds or commodity specialists who can position themselves in the strategic materials needed for the production and transmission of electricity, as well as production. of batteries such as copper, aluminum, lithium and nickel. In this regard, it is interesting that Long Short managers who invested in energy since January 2014 significantly outperformed those who did not (+112.5% ​​vs. +173.3%).¹). Finally, there are several funds that specialize in trading carbon emission allowances. It’s worth noting that institutional investors around the world have very little exposure to these issues, because nobody likes commodities. Therefore, we are at the beginning of redistribution to this sector. Examples of managers active in commodities and energy include KLI, Westbeck, Andurand and Soroban. Among the Global Macro managers that can invest in all asset classes and especially commodities, we find Caxton, Gemsstock, Rokos and even Kirkoswald.

Energy independence at any cost

By clearly highlighting the extent of their dependence on the totalitarian regime, the shutdown of the Russian oil and gas pipeline prompted some serious soul-searching in European countries, primarily Germany. This was followed by a general review of their sources of supply and a strong political will to achieve better energy security and independence. The current crisis has also led to some resurgence of nuclear power, which is now seen as a lesser evil than greenhouse gas emissions from an autonomy perspective (aside from uranium supply). Apart from the issue of waste (which we know how to store if it is not treated), nuclear energy is relatively clean energy. In our multipolar regime, raw materials are becoming more of a strategic issue than ever.

The end of globalization

Another unintended consequence of the COVID-19 pandemic and the energy crisis has been the pendulum swing to globalization, a phenomenon that was thought to be irreversible. Indeed, severe bottlenecks, supply chain disruptions, and China’s increasingly expansionist attitude, no longer content to be the world’s factory, have highlighted the limits of the economic model that has prevailed for 50 years. Many governments, as well as companies of all sizes, have committed to relocating their production or moving their supply sources and suppliers closer. The new IRA law also provides numerous tax incentives to favor relocation and domestic production. Here again, because of their sensitivity, ability to play both upside and downside, and ability to invest in currencies, commodities or derivatives, alternative managers are best placed to make the most of part of this new major trend. Expect increased volatility and significant differences from sector to sector in the coming years. Therefore, active management should be superior to index methods.