Options bets allow green investors to predict returns

NEW YORK: If you want to know how your green stock portfolio is likely to perform next quarter, you should take a look at hedge funds’ options bets.

That’s according to a newly published academic paper which looks at a decade’s worth of data from more than 1,900 hedge fund firms through 2022.

A key finding of the study is that the buildup of hedge fund managers’ put and call options on a given green equity can be used to “predict the stock’s future returns,” George Aragon, a professor at Arizona State University and a co-author of the paper, said in an interview.

The analysis feeds into a wider debate around green investing strategies, which have delivered mixed results in recent years. The S&P Global Clean Energy Index fell more than 20% last year as the impact of higher interest rates pummelled capital-intensive green projects.

This year, it’s down another 12%. The S&P 500, by comparison, has gained about 30% since the beginning of 2023.

High-profile Republicans have seized on such data to attack green investing as a dereliction of a portfolio manager’s fiduciary duty, leading to legal threats and outright bans on the wider environmental, social and governance investing movement.

Against that backdrop, the hedge fund industry’s approach to green investing is of particular interest. The authors of the paper, titled Are Hedge Funds Exploiting Climate Concerns?, posit that hedge funds have no “non-pecuniary preferences,” meaning their green bets are only made with a fiduciary goal in mind.

The study found that hedge funds are generally better than the wider market at predicting changes in sentiment and pricing around green stocks, and of taking advantage of those shifts.

For example, when the general level of interest in climate change slips – gauged by looking at the number of news stories on climate – hedge funds use put options to sell at pre-agreed prices as green stocks decline in value.

Conversely, when there’s a higher level of general interest in climate change, hedge funds use call options to buy at pre-agreed prices in a rising market. — Bloomberg