A carbon skeptic hedge fund makes 32% in 2020. Photographer: Phil Weymouth/Bloomberg
When environmentalist teenager Greta Thurnburg became the talk of the world in 2019, meeting with the Pope and lecturing the United Nations on climate change, it was the clearest sign yet that going green is going mainstream.
The super-rich will dedicate some $50 trillion to sustainable investments in coming years and blue chip Wall Street firms like Goldman Sachs
Boston-based hedge fund manager James Jampel, of $460 million in assets HITE Hedge Asset Management, has a simple way to play the green arms race. He’s betting against the entire carbon industry, which he believes is in chronic decline much like whip-and-buggy-makers at the dawn of the auto age, or Sears amid the rise of Amazon
When the OPEC’s price cartel was obliterated once more—this time by a March spat between Saudi Arabia and Russia at the absolute worst time—and oil fell to generational lows of $20 a barrel, HITE made a killing. Jampel’s $95 million HITE Carbon Offset Fund has gained 32% year-t0-date, according to a source, while the S&P 500 index has fallen by about a quarter.
“[L]et’s have the experts choose winners in the new green economy,” says Jampel, “It’s so much easier to bet against the obvious losers.”
Oil prices are propped up by tenuous cooperation between two of the world’s more chaotic regimes in Saudi Arabia and Russia, Jampel points out. Furthermore, production in more stable locales like the U.S. and Canada is driven by scores of small and mid-sized drillers with exorbitant capital needs, which are financed by banks and c-suites who value absolute growth above a return on investment investment. It’s all essentially a recipe for disaster.
With this insight, Jampel launched an investment fund in mid-2018 designed to profit from a simple trade: “Our bet was that carbon-related earnings will fall faster than non carbon related-earnings going forward, and multiples afforded to carbon-related businesses will shrink faster than multiples afforded to non carbon-related businesses,” he deadpans.
The market neutral fund shorts carbon-related securities throughout the industry, but goes long hedges. Scores of shale producers now sit on the doorstep of bankruptcy, and the outlook isn’t much brighter for the industry’s infrastructure, from pipelines, to gas stations, transport ships, and refiners. “We are always short the most vulnerable and overvalued companies in the carbon value chain at any particular moment,” he says.
Jampel is an unlikely hedge fund impresario to make a meal out of the chaos of 2020. A Harvard grad with an MBA from Northwestern’s Kellogg school of business, Jampel is a flamed out management consultant.
Once a principal at consultancy AT Kearney, he eventually became CFO of a trucking rollup called Road Link USA at the peak of the 2000 bubble. He says he didn’t like the strategy and was fired for questioning its merit. Ultimately, the company went bust.
After, Jampel decided to start a hedge fund with $650,000 of his savings, running long-short strategies in the energy sector. HITE “started with me in my bathrobe on the couch,” he reflects. Alongside co-CIO Matt Niblack, Jampel’s firm now employs 11 portfolio managers and researchers who oversee a total of $460 million in assets.
It dawned on Jampel and his colleagues many years ago that the best days of oil were in the rear-view mirror. “We thought, this is going to get worse because technology is rapidly advancing to the point where electric vehicles, and solar and wind generation is becoming a viable substitute to carbon,” he says.
The big break came in 2018 when their carbon skepticism boiled over and the firm set up a fund to exploit the theory that carbon was a long-term short. “It’s like a little bit of encroachment, then a little bit more, and then all of a sudden there’s this S-curve and it’s all gone,” says Jampel, “Its kind of what happened to tobacco. Tobacco had a very nice and long run until a substitute called Juul came along.”
One obviously 2020 short was Occidental Petroleum
“It was astounding to me that anyone would want to buy Anadarko given where things were going. Like people are really buying stuff? Are you nuts!” he exclaims. “This is classic declining industry B.S. How are we going to handle the decline? Get bigger.”
Even with oil prices down by more than half in 2020 and many equities plunging much more, Jampel’s outlook isn’t particularly bright.
“Eighty percent of these companies are going bankrupt,” he says of the industry’s small players, “and when they’re recapped at something greater than three-times cashflow it’s probably wrong.”
Until then, he’s prepared to treat carbon companies sort of like coal miners—serial bankruptcy filers that incinerate capital for many years to come.
“We’re not sure there’s such a thing as investment grade energy credit,” says Jampel. “Some of these companies have issued bonds that don’t mature until 2049… I don’t know. They better mature in four years.”
So when’t the bottom?
“An exploration and production company trading at three times EBITDA, that’s maybe when the fund is over,” he says.
