Tuesday, January 31, 2023

“Hedge funds can contribute to the climate transition” — 5 takeaways from HITE Hedge

James Jampel and Matt Niblack, co-CIOs at energy-focused firm HITE Hedge Asset Management, were guests in episode eight of the AFI podcast.

The pair gave an insight into trading this year’s historic market turbulence, explained how hedge funds can contribute to the climate transition, argued that shorting companies should count as ESG, and revealed their approach to succession planning. The US manager runs $700m and specialises in market-neutral strategies.

Listen here and read my five takeaways below.

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1. Hedge funds can contribute to the climate transition

Jampel admits the oil and gas space is extremely challenged by the climate transition in the long-term. “It doesn’t make sense to me to be heavily invested in a product people are trying to use less of over time.”

But he believes hedge funds can contribute positively to the climate transition.

“How do you go long and engage without taking the risk of the sector? You invest in a market-neutral hedge fund that negates the risk of being invested in the sector. It allows you attempt to engage without being long the sector.”

2. Short-selling is part of ESG

Jampel says investors care about returns “first and foremost, but anyone who is a citizen of the planet would care about the level of emissions going forward.” 

It is a different situation to when he started HITE in 2004, when there was “rampant denialism about climate change.”

He says the arguments against counting shorting as part of ESG are not logical.

“You hear that shorting a company never removed a ton of carbon from the atmosphere, and that may be true, but owning or selling a stock didn’t either. We think that argument is specious.

“Shorting allows you to be long other oil and gas companies without taking an industry risk and therefore being able to engage.”

3. Spreads have opened up this year

Russia’s invasion of Ukraine has driven prices skyward in many energy markets. HITE takes a relative value rather than directional approach, so opportunities have arisen from widening spreads amid the volatility, notably in terms of European natural gas versus the US.

“One of the less obvious ones is the spread refiners can make buying oil and refining it into diesel. Demand for diesel has increased dramatically,” adds Niblack.

“War has driven home the utter unpredictability of a lot of these commodity prices,” says Jampel. “This results in a lot of opportunity for us. It shuffles the deck and gives us the opportunity to put on relative trades. The key to what we do is being humble enough to admit we can’t predict prices.”

4. Volatility has made risk management more important than ever

“Volatility in the energy space is not new. There was volatility previously around the price war between US shale and Saudi Arabia,” says Niblack. “There is volatility every time there are macro concerns. The fact we have been in the market for many cycles means we know how to manage it.”

This year the volatility has led them to tighten up their long and short pairings and kept realised and implied vol in balance. “All the time being careful not to hedge out the alpha opportunity.”

5. Succession planning can be done

HITE Hedge is a rare example of a firm to have executed a succession plan, with Jampel founding the firm in 2004 and Niblack a decade ago, who since became co-CIO.

“When you see talent you need to let it run,” says Jampel. While they serve as co-CIOs, Niblack leads on portfolio management while Jampel leads on investor relations and operations.