07 August 2006, Pensions and Investments

K2 chooses unique investments for its fund of funds

Movie rights. Weather derivatives. Natural catastrophe insurance. Carbon dioxide emissions credits. It's not your typical portfolio. But hedge funds are going where few investors have gone before. The beauty of any of these markets is that they not only offer the potential for chunky returns, but they also have virtually zero correlation to domestic stock and bond markets - and to other hedge fund portfolios as well.

K2 Advisors LLC, a Stamford, Conn.-based hedge fund-of-funds firm with $5 billion in assets under management, is bundling a host of those esoteric investment strategies into a single fund of funds now being touted to institutional investors.

One area in which K2 has invested is the nascent carbon dioxide emissions market, spawned by the Kyoto Protocol curbing global emissions. In January 2005, the European Union formed the EU Emission Trading Scheme, a secondary trading market for carbon dioxide and other greenhouse gases.

Basically, Western European companies can meet caps on emissions by purchasing credits from sellers in other countries - typically from India, China, Brazil and Eastern Europe, explained Andrew Pearson, Chief operating officer for markets at Climate Change Capital, London, which manages a portfolio for K2. But the markets can be very volatile. In late April, data from Western European governments suggested emissions might fall well below projected levels - meaning the emission credits were worth far less than valued. In the space of five trading days, the value of credits plunged more than 70% from e31 per ton ($24.20), Mr. Pearson said. Prices since have rebounded to around e16. He said company officials expect the strategy to return more than 20% a year over the long term.

This article appeared on Pensions&Investments online on August 7, 2006. To read the article in full please click here.

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