HITE refuels its energy sector focus with one key short

As more political pundits see Joe Biden winning in November, there is one firm that sees it enhancing an already lucrative trading strategy. James Jampel grew up under the shadow of the auto industry in his native suburban Detroit. Despite his love for the Motor City, Jampel is the first to say investors like himself need to be prepared to say goodbye to our fuel-consuming ways. Jampel founded the $500 million hedge fund shop HITE Hedge Asset Management 16 years ago with his own money and no experience in hedge funds nor in energy investing. Still he saw potential in the early 2000s in MLPs and water rights in building his systematic trading approach. “This is existential for the planet,” said Jampel of the current concerns over carbon fueling climate change. “We have the thesis that investment-grade energy credit is an oxymoron.” He sees energy developing into a niche area of investment area that is currently being roped off, in much the same way tobacco investments were previously in the 1990s. In a recent note to investors obtained by Alternatives Watch, Jampel pointed out that as investor interest in the energy sector remains low, the smartest analysts, portfolio managers and those on the sell-side continue to gravitate away from the sector. He said that one of the most prominent and successful sell side analysts in the space recently told HITE that they would happily take a job analyzing renewables if someone offered it. We have the thesis that investment-grade energy credit is an oxymoron James Jampel And while many in the endowment world are talking divestment of fossil fuel holdings, for HITE the approach is much more nuanced and rooted in a traditional hedge fund mindset. “You can try to pick the winners and we think that is crowded,” he recently said in an exclusive interview with Alternatives Watch. “The difference is we are not picking the winners, but we are shorting the losers.” And the biggest short of all is carbon, which is a thematic approach that HITE has created in response to climate change. HITE Carbon Offset is a $117 million hedge fund launched in mid-2018 with a focus on shorting carbon-related securities (both equities and credit) throughout the energy value chain. The bets are against the producers, processors, transporters, refiners, marketers and users of hydrocarbons. The underlying theme is that carbon-related securities will underperform against noncarbon-related securities. Year-to-date through June, the HITE Carbon Offset fund is up 22.6% and in June alone was up 1.4%, according to those familiar with the fund, which had a slight loss in the second quarter as oil futures soared 92% after the steep declines in the first quarter touched off by the global pandemic. Long-term though, Jampel sees the dislocation in some of the firm’s trades to be short lived. He finds that the current relative value trading environment to remain strong and what is shaping up to be a Democratic victory in November will probably renew the opportunity set in resulting in what HITE says is the largest regulatory disruptions to the U.S. and potentially Canadian industries in a at least a generation. The firm’s smaller sub-$100 million market neutral fund HITE Energy still has seen some strong returns too. The fund invests across midstream, processing and downstream markets and saw gains of 15.1% during the first half of 2020, according to the latest letter to investors seen by Alternatives Watch. The strategy remains capacity driven as it invests in energy equities and credit but does have small amounts of commodity exposure to act as ballast. There is modest leverage in the fund, but no net exposure. But still, the newer Carbon Offset fund he suspects will grow and has the capacity to do so. Should the Democrats win in November, Joe Biden’s energy plan is expected to have a huge impact to the tune of $2 trillion. This means that technology for fossil fuel substitutes is proliferating, such as wind, solar, electric vehicles and more, according to Jampel. Secondly, as fossil fuel companies will be hit by regulation and as volume declines what they do sell will be less profitable, he added. HITE does fundamental analysis and so Jampel said the team knows all the incentive structures and has every trick in the book after 16-plus years of trading. The current carbon-short strategy is not one he sees too many other hedge fund managers replicating overnight. “Most hedge fund managers and a lot of people are closet long and long has been bad,” said Jampel. “You also have to have the chutzpah to say the space we have been operating in for so long is declining and we need to short it and that’s hard to do psychologically.”

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