The Climate Short: Hedge Funds Pile Up Huge Bets Against Green Future (2024)

Green | The Big Take

The $5 trillion industry's move against clean energy and green technology may prove more damaging than political pushback over "woke" capitalism.

By Sheryl Lee, Ishika Mookerjee and Christopher Udemans

October 21, 2024, 5:00 AM UTC

The fast money on Wall Street has taken a close look at key sectors in the green economy and decided to bet against them.

Despite vast green stimulus packages in the US, Europe and China, more hedge funds are on average net short batteries, solar, electric vehicles and hydrogen than are long those sectors; and more funds are net long fossil fuels than are shorting oil, gas and coal, according to a Bloomberg News analysis of positions voluntarily disclosed by roughly 500 hedge funds to Hazeltree, a data compiler in the alternative investment industry.

The findings provide a glimpse of how the most rarefied corner of finance has cooled on the investment prospects of a green transition that scientists, along with many policymakers as well as company executives and economists, argue is critical to avoid the most devastating impacts from global warming.

Managers in the $5 trillion hedge fund industry say the reason is obvious: Despite the promises, clean energy and green technology stocks have lagged far behind the broader market. Deep-pocketed institutions are concluding that many climate investments won’t pay off as quickly, or as lucratively, as they’d hoped.

The Bloomberg analysis reveals the preferences of an investor class known for trying to conduct its business outside the glare of public scrutiny.

The hedge funds’ bets have coincided with a wave of momentum that’s been building against key corners of the green economy. Since a recent high in 2021, the S&P Global Clean Energy Index has lost almost 60% of its value, while the S&P 500 Index and the S&P Global Oil Index have soared more than 50%. Impax Asset Management, a $50 billion investment firm that’s made a name for itself as a champion of the clean-energy transition, has seen its market value more than halved over the period.

Renaud Saleur, founder and chief executive officer of Geneva-based hedge fund manager Anaconda Invest SA, says he and his team “have been looking for an inflection point for years” because they’re keen to build investments in the green transition. But despite the stimulus, “we don’t see the inflection as yet.”

Beyond the tougher macro-economic backdrop that green investors have had to contend with over the past few years — with higher interest rates upending capital-intensive projects like offshore wind farms, and limiting funding for emerging technologies — there continues to be a hostile political backdrop. Investment managers who remain full-throated in their embrace of green, sustainable or ESG (environmental, social and governance) strategies regularly have to defend themselves against US Republicans enraged by what they see as a “woke,” anti-capitalist conspiracy.

Then there’s the other, more consequential political risk. Most of the hedge fund managers Bloomberg interviewed pointed to an increasingly hostile geopolitical environment, with obstacles such as tariff wars leaving them unwilling to invest in classic green bets such as EVs or solar power. In fact, with much of the supply chain for green technology now depending on China, the risk of a full-blown trade war targeting its products has become a direct threat to the financial appeal of clean energy, they said.

“Geopolitics is the key reason why the energy transition theme isn’t working out,” says Kerry Goh, CEO of Kamet Capital Partners Pte., which oversees more than $1 billion from its base in Singapore. “China commands a dominant position in most of these sectors, and tariffs are spoiling the investment case.”

And if Donald Trump regains the White House after November’s election, ESG investors would likely need to brace for a whole new level of pain. Trump has already aired plans to rescind unspent climate funding, prioritize lower gasoline prices and raise duties on Chinese-made goods to 60% or more.

The tariff war targeting China will feed inflation in Europe and the US, undermining the appeal of everything from solar cells to EVs, Goh said. Until the tide of protectionism recedes, it’s hard to make a broad investment case for the transition, he said.

A failure to persuade money managers of the financial merits of climate investments is likely to complicate efforts to accelerate spending on a greener global economy. To achieve net-zero emissions by 2050, the world would need to deploy $215 trillion to deliver a fully decarbonized energy system, BloombergNEF said in its latest annual New Energy Outlook report.

On a sector-by-sector basis, Bloomberg has analyzed bets placed by hedge funds with managed assets ranging from $50 million to $50 billion to offer a picture of how the wider industry views the prospects of key green sectors. There are a few bright spots, such as wind power and grids. But overall, the data point to a reluctance among hedge funds to go green.

In the third quarter, more hedge funds were short stocks in the Invesco Solar ETF than were long. Overall, net shorts outnumbered net longs for 77% of companies, compared with 33% in the first quarter of 2021, when momentum for the green transition hit a peak.

Most hedge fund managers Bloomberg interviewed said China’s dominance in the solar sector makes it an extremely challenging exposure for investors in Europe and the US.

There are a few exceptions, such as US-listed First Solar Inc., which is up 18% this year through Oct. 17. The company, unlike many peers, has a US-centric value chain and doesn’t rely on crystalline-silicon technology, which is dominated by Chinese manufacturers.

Per Lekander, founder of $2.7 billion London-based hedge fund Clean Energy Transition LLP, says solar is among green sectors that have been “more or less terrible” for the past three years. “Solar is probably structurally screwed. I think there are pockets, but wherever China is strong, I’m quite skeptical.”

In short, “wherever China is dominating, run for the hills,” Lekander said.

Saleur says Anaconda is short solar stocks such as San Francisco-based Sunrun Inc. as well as the Invesco Solar ETF, which has lost more than 30% this year through Oct. 17. A few companies are worth long bets, he says, namely Enphase Energy Inc., First Solar and MasTec Inc.

Slowing sales growth has turned hedge fund managers increasingly bearish on EVs. The data show that funds with short positions exceeded those going long on about 55% of the companies in the KraneShares Electric Vehicles & Future Mobility Index ETF, compared with 35% in early 2021.

Shorts against producers of EV batteries, and related suppliers of metals and chemicals, have also jumped. As of September, hedge funds with net shorts topped those with net longs on 57% of companies in the Global X Lithium & Battery Tech ETF, compared with 29% in early 2021.

“I’m not saying EVs are dead forever, I’m just saying growth is lower and the industry has over-invested,” says Lekander, who’s short Tesla Inc. and is also betting against EV battery and component suppliers.

It’s “two to three years before we can see an inflection point,” he said.

Meanwhile BYD Co., China’s best-selling car brand and a challenger to Tesla’s status as the global EV leader, is an appealing investment in large part because it’s not as sensitive to supply-chain jolts as many competitors, according to Kamet’s Goh. “They do everything in-house,” including batteries, and that helps them to manage costs, he said.

The number of hedge funds with long bets on thermal coal, oil and gas companies exceeded those with net short positions at the end of September.

Pierre Andurand, the famed hedge fund manager behind commodity-focused Andurand Capital Management, says that when it comes to crude oil, “the short-term risk is for higher prices because inventories are low,” with prospects of an increasingly entrenched conflict in the Middle East potentially adding to that price pressure.

As of September, hedge funds with net longs outnumbered those with net shorts on 53% of companies in the S&P Global Oil Index, up from 48% in 2021.

Hedge funds also favor thermal coal, with the longs exceeding the shorts on about 73% of a group of 20 major companies in the sector. To be sure, the number of short positions have been rising.

The commitment to coal coincides with rising global electricity consumption, particularly in China and India. And though coal is now cheaper than it was right after Russia invaded Ukraine, supply constraints created by net-zero policies have managed to keep prices high.

Barry Norris, the founder and chief investment officer of UK hedge fund Argonaut Capital Partners LLP and a long-time skeptic of the green transition, says fossil fuels remain necessary as a reliable source of energy. He’s long Glencore Plc, Vista Energy and Frontline Plc.

“The energy transition is failing, and will fail,” Norris said.

The wind-power sector, which has been pummeled in recent years by project cancelations as higher interest rates and supply-chain disruptions upended the business case, is viewed by hedge funds as an area that’s worth investing in.

Hedge funds with long bets outnumbered those with short bets for close to 60% of the companies in the First Trust Global Wind Energy ETF. Though a rare example of green optimism for the investor group, the figure is down from 73% in 2021, the data show.

“Demand is there,” said Lekander, who is long Vestas Wind Systems A/S and Nordex SE. “I’m bullish wind as a real recovery story.”

That optimism is underpinned by growing government orders for new wind parks. Some 73 gigawatts of offshore wind capacity was commissioned globally at the end of 2023, a figure that’s set to increase tenfold by 2040, according to an analysis by BNEF.

“We’re cautiously optimistic that we’ve seen a bottom” in the renewables sector as the interest-rate cycle turns, said Lisa Audet, founder and CIO at Tall Trees Capital Management LP. However, Audet says she’s now “sidestepping” the sector ahead of the US election given policy uncertainty.

“Once we have more clarity around the policy landscape for clean energy in the US, we’re quite ready to get back in some of those names that we have owned before,” Audet said.

Grid infrastructure and power equipment — a segment that spans transmission lines to transformers and accommodates both renewables and fossil fuels — is an exposure that hedge funds like.

The number of funds going long outnumbered those with short bets on 65% of companies in the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index fund, up from 58% three years ago.

“A lot of sub-sectors will benefit from power demand growth in the US,” said Ran Zhou, CIO at $2.7 billion New York-based hedge fund, Electron Capital Partners LLC. “It’s one of the things we’re getting really excited about.”

Demand for electricity is rising fast, in large part thanks to the vast needs of data centers powering the development of artificial intelligence. And grid investment globally needs to double to more than $600 billion a year by 2030 if nations are to meet climate targets, according to the International Energy Agency.

The sector is “one of the biggest mispriced opportunity sets” because “grid infrastructure is structurally under-invested,” said Albert Chu, portfolio manager at Man Group Plc, the world’s largest publicly traded hedge fund manager with almost $180 billion of assets.

Importantly, grid infrastructure is seen as a rare opportunity to get exposure to the energy transition without being wrong-footed by the tariff wars and over-supply concerns that have pitted China against the US and Europe.

“It’s very difficult for a hedge fund to price in a geopolitical risk for a length of time,” said George Boubouras, head of research at K2 Asset Management in Melbourne. And that means there’s a “long winter ahead” for the green transition trade.