Thursday, May 29, 2008

Biocapacity - Consuming Like an American

In the midst of all the administrivia, I want to get back to talking about what's actually important - green investing! So I think I'll start by explaining a piece of my model. This is a bit tricky, since information is really the only capital, and explaining my model may make me obsolete... that said, I think it's more important to be open source than to make a killing.

Biocapacity Says What?

I read about the biocapacity concept on the Global Footprint Network at first, but when I expanded my research, I realized the study has been around a long long time. Essentially, it's a combination of economics, science, and even psychology, as it measures how much we consume versus how much pollution we output.

For my fund, I'm using mostly macro level research. It's important to understand that I use biocapacity to NARROW MY ASSET POOL, not as a indicator that a country or investment is worth investing in. To that end, I'm interested in comparing one country's consumption and production to another's. In order to do the comparison, I obviously need two sets of numbers: "consumption" and "production".

Consumption: Where the U.S. Gets a Gold Star

The consumption, or footprint, is the easiest to measure, as it's a more tangible number for the most part. Most research doesn't include the negative externalities in the metrics, since it's fairly difficult to put a number behind an externality (economists have a million different ways of trying, but for the most part it's just a sketch of the reality). Instead, I'm left with a fair amount of easy numbers: carbon output, nuclear footprint, and some slightly extrapolated numbers in overfishing, deforestation, and crop footprint. The U.S. and China are the two biggest consumers on the planet. China's excuse is the 1 billion people. The U.S.? Well, we're just fat.

Production: Where Working in a Cubicle Doesn't Count

The production, or biocapacity, is a bit more difficult, but it's a measure of resource supply. What makes it tricky is that biocapacity is more of a moving target. Resources spontaneously dry up, ecological management can change capacity, and as global warming occurs, arable land is shifting year by year to unusable land.

The difference between these two numbers represent a country's reserve (when positive) or deficit (when negative). To compare apples to apples, these are done in global hectares per person (outside the U.S., a hectare means something). As you can see, there are some obvious logical problems than can occur with this. Primarily "emerging" markets are favored, as they either are primarily agricultural with a minimum of industrial waste, or have massive amounts of arable land to spare. This is a-okay with me, it's basically the model's way of saying "well, they haven't screwed it all up yet."

Smugly Model-licious: Currency, and Why I Need More of It

I've developed two distinct theories on using biocapacity metrics for investment purposes to fill the two basic ways to "invest in a country": currency and "the index." Currency is the purest way, in my opinion, since it's a direct reflection of a company or region's strength. It's also extremely liquid, and replete with speculators and the smartest of the smart, and probably the most efficient market on earth. I've linked currency directly with biological reserve, the theory being that a country that produces more than it consumes is better positioned for long term stability. This bears out on the micro level - take a company that can consistently profit versus one that is unable to keep up with its growth or overspends. Logical, right? As a long term play, I agree. That's why the model is designed to identify these countries and put them in the asset mix.

Smugly Model-licious: Not Your Momma's Index

The second part to my (infinitely wise?) model deals with indexes. Indexes are much more a function of a market's psychology than anything else - if a market perceives itself or the world perceives a market as profitable, the index tends to do strongly. Sometimes (often), this has nothing to do with reality. The technology boom of the 90s and subsequent crash of 2000 is a perfect example. The market thought, "this is great, free money!" The reality was, "what's an internet?" When the bottom falls out, it's a long and dangerous fall. As markets are also primarily information driven, it is impossible to know what a market will do without insider information. This includes our own market, S&P 500 and the Nasdaq Composite. We're finding this out, to our detriment, with the housing bust - Wall Street made billions, you lose your house. That's the way it works!

What an index IS good for is as a cross section for a country's public industries. And industry tends to be the primary polluter (as proven by the biocapacity studies) and consumer of natural resources. So, to narrow down the index pool to more "sustainable" industries, I used the biological footprint component to indicate which index should be included, and which was an over polluter.

In the end, my country list looks like the below. Obviously, there are a good many listed that either can't be invested in (no index, no active currency trading), or don't make the cut on the technical analysis side of the model (used to pick the investments and timing), but it at least gives you a good sense of how biocapacity works:

Afghanistan Colombia Laos Norway
Angola Congo Latvia Panama
Argentina Congo Dem Rep Lesotho Paraguay
Australia Côte d'Ivoire Liberia Peru
Benin Ecuador Madagascar Russia
Bolivia Finland Malaysia Sierra Leone
Botswana Gabon Mali Somalia
Brazil Georgia Mauritania Sudan
Burkina Faso Ghana Mongolia Sweden
Cambodia Guinea Mozambique Switzerland
Cameroon Guinea-Bissau Myanmar Tanzania
Canada Honduras Namibia Turkmenistan
Central African Rep Israel New Zealand Uruguay
Chad Kazakhstan Nicaragua Venezuela
Chile Kyrgyzstan Niger Zambia

So this is a taste of some of the research and metrics that go into the fund. This, to me, is the fun stuff. I could debate it all day - what country should qualify, what "sustainable" really means. But this part of the fund is one of the primary factors setting it apart from other green based funds - it expands the idea of green beyond just energy and technology. It also gets you more diversified, helps spread out risk, and just makes a lot of logical sense. If green is a mindset, shouldn't investing green be global? Hell yeah.

Tuesday, May 27, 2008

The Quick List

From time to time, I'll be putting up a "quick list" of helpful links, definitions, or things I think are or may be useful. It's sort of like a public rememberall. Yes, I just quoted Harry Potter. No, I don't have all the unabridged books on tape on my iPod (... yes I do).

Federal Employer Identification Number
You can apply for this before you file any LLC, LP, or Corporation papers. It'll let you get a business credit card, employees (if you can afford them), or other government perks like paying taxes. Here's the online application link. Applying for an EIN is totally free.

Massachussets Limited Liability Company
Since I'm Boston based, I only know about it in MA, but most state divisions of corporation can file online now! This is great, since it saves in lawyers fees for setting up an LLC, and sometimes even more complicated entities (which translates to $3,000 more in my pocket). Here's the application link. Cost of setup in MA is $500.

American Express Small Business Card
In my opinion, AmEx is the best. They force you to pay your card off every month before making new purchases. This doesn't save you from running up big bills, but it does save you from running bills if you're delinquent. If anyone knows of any local credit card companies, specifically in MA for me, or elsewhere, I prefer supporting local community if I can (within reason). Go here for more information on AmEx business cards. Applying is free, acceptance is priceless (except for the finance charges and annual fee).

Business Cards from
GreenerPrinter was great to work with. They're based in Berkeley, CA (I used to live there), and have excellent quality recycled cards. I paid about $120 for a rush job on 500 business cards, and they were there a day early and perfectly done. Website is here, check it out.

Delaware Limited Partnership
I'm working on this part, and this will be the actual fund for limited partners to invest in. I'll be working with a lawyer for this, but Delaware has very favorable tax law on LPs, so most every domestic hedge fund is based out of Delaware. You can reserve your LP name online at the Delaware department of Corporations here. Reservation fee is $99, I'll let you know how much it is to file when I get there.

Much more to come, like the Term Sheet, Offering Memorandum, and how I actually did some of this stuff.

Saturday, May 24, 2008

The Urinal Pitch

So forget about paperwork and administrivia - I need to work on my pitch. And it needs to be short enough so I can explain what I do to an institutional finance board member who's peeing in the stall next to me at the next Gogol Bordello show. Obviously, a likely scenario I need to be prepared for.

What I really do is pretty simple, so let's start simple.

"I use studies on global consumption and carbon output to go long and short global indexes, currencies, green energy, technology, and socially responsible assets. The fund is designed entirely to mitigate risk using the 30 day VIX (S&P 500 volatility measure) and the 30 day VXN (Nasdaq Composite volatility measure). I use fundamental analysis on a macro level, and technical analysis on the micro level."

Um. Ok, so it sounds complicated, but it's really simple. So let's start with some definitions and see if I can work that into something... sayable.

What I'm really doing is looking at two universes. 1.) What I define as a green investment, and 2.) What investors think about the next 30 days in the market. I've defined green more broadly than most. I do it for a few reasons, but the primary is diversification. The secondary reason is that I think I'm right and analysts are narrow minded. That's right, I'm a cocky jerk. Surprise!

But really, green is far more than just individual energy and technology stocks. Green, like everything else, is political, academic, controversial, and above all, a mindset. For example, Brazil does an awesome job of destroying its own rain forests. They are like superhero rain forest chopper downers. But, Brazil is the world leader in Ethanol use, and is far more sustainable as an economy than the United States. So is Brazil "green"? This is where I developed some metrics and scoring systems to decide who is green and who isn't on a macro level (currency and industry).

So that leads us to what investors think. Really, what drives market prices more than what people think? And what is a better indicator of what people think than forward looking volatility? Institutions or retail investors alike make daily bets on how volatile the market will be 30 days from now. Basically, they are betting on a combination of factors: media, fear, market cycles, and personal instinct. So they're doing my work for me! They are telling me that the market is scary or the market is OK. The only trick is to figure out a way to measure how scary or how OK.

When I combine these two things, I get my model and my fund. And I can say:

"I manage a green hedge fund. I use metrics in green industry, sustainable capitalist practices, and market volatility to make long and short investments in a select green asset pool. The fund emphasizes profitability and sustainability while reducing market risk."

Better? Comments? Am I overreaching, a moron, or am I a genius? My vote is always on genius, but it can't hurt to ask.

Tuesday, May 20, 2008

So Many Options, So Little Money...

So I've done a fair amount of research, and there seem to be basically three ways to set up a fund. Two of them are very very expensive.

Mutual Funds

Mutual Funds are subject to a lot of regulation. Not to mention the rules to running the fund. For instance, mutual funds cannot have a 20% position in a single stock. They are registered with the S.E.C., which is an expensive ongoing cost. Mutual fund fees are carefully regulated, and the market is flooded. Frankly, who the hell wants to report to the government on an ongoing basis? The Investment Act of 1944 is probably the best intentioned piece of legislation the finance world has. It's intentions are soooo good, and yet, somehow, it's managed to put all the money at the top and give none of it to me. Way to go government.

Managed Accounts

Another expensive, heavily regulated path to take, managed accounts allow for a much greater allocation freedom with all the burdens of a mutual fund. The trade off is the selling minimums are typically higher, and the accounting costs eat into investor profits in a massive way. There is no accredited regulation, though, so average joes can buy this if they can afford the minimums. I've considered this carefully, since I think my demographic is farmer's market shopping hipster yuppies ages 25 to 40. Sort of like a sitcom. The problem is cost: I'm broke. So, I'm left with the cheapest option with the most freedom.

Hedge Funds

Hedge Funds are basically investment manager playgrounds. Most managers use high amounts of leverage, complicated math and/or "black box" magic to invest in vast combinations of assets in a vast amount of markets all over the globe. They do this because hedge funds are virtually unregulated money making machines.

Unregulated you say? Well, sort of regulated.

For instance, as a hedge fund, I cannot advertise. To anyone. Ever. Now that's a restriction that's tough to beat. So instead, everyone just does it behind the SEC's back. I know, I was a financial adviser professionally. Fund managers all advertise in covert ways - like "leaks" and "broker dealer only" material. Handing out a leaflet that is designed for a client but says broker dealer only and offering a sales trail of 2%+ per year, and you don't think the advisers and B/D's have a conflict of interest?

Money making machine you say? Well, they make money for someone at least.

Only they don't necessarily make the investor money, they usually make themselves and their brokers a killing in management and brokerage fees. Honestly, it's ugly. You have to wonder what, exactly, does that 0.25% annual "administrative" fee go towards? Especially in funds with over $500M under management. That's $1.25M in administration!!! Maybe they give a break to institutions, but on the retail side, even the millionaires get screwed. I guess morally it does feel better to take ridiculous fees from monocle wearing millionaires with pink poodles riding Falabella horses.

Even though it can be a sleazy world, unregulated means one thing to me: cheap entry.

Friday, May 16, 2008

And off we go...

So let me explain a little about what I'm doing, why I'm doing it, and what I think about.

I have decided to start a hedge fund. A green hedge fund. I've decided to do this for several reasons.

1.) Sustainability is important to me. Investing responsibly is important to me.

I just spent three years as a licensed stock broker specializing in real estate (REITs), managed futures, and other alternative investment vehicles. Really, I spent three years making money for other people, getting very little validation, expending virtually no brain power, and helping to perpetuate the "make money no matter the cost" mentality.

I put my fut down when our firm decided to sell oil and gas, but there's no stopping "progress." So, rather than fighting an uphill battle I definitely won't win, I decided to fight an uphill battle I probably won't win.

2.) Investing responsibly doesn't have to mean giving up return.

I'm smart, but I know I'm not smarter than the thousands of PhD's and investment bankers and fund managers in finance trying to make money in the markets. But somehow, I still feel like Wall Street hasn't figured out how to make money and keep Main Street clean, local, and happy. In fact, it's usually just the opposite - Wall Street usually makes its money at Main Street's expense.

I've been modeling my fund for over a year and half. When I say modeling, I mean complicated Excel sheets that would be far easier in VBA and Access or C++, but I am not a programmer. Instead, I decided to stick with my strengths. I've chosen an asset base using a combination of biocapacity studies and discretionary research that expands the notion of green beyond most normal definitions. I decided early on that green can't just be green energy - it has to be a green lifestyle, from the micro level (specific stocks or bonds) to the macro level (industry, commodity, and currency). By expanding my definition of green, I think returns can often be the same, if not better, than the open market. If I can offer the option to hopefully make the same amount or more than the S&P and be responsible, why wouldn't someone invest? That's the theory at least.

2.) I don't want to work for anyone anymore.

I'm not that interested in riches. I'm not interested in being a big shot. I don't need vast success, I don't want magazine covers, I don't want to be famous. I just don't want someone telling me what to do. I like to dress like a hipster, bleach my hair, get (more) tattoos, and wake up at 10am. It's very elitist of me, yes. It's pretty privileged, I admit. But I want to shop at farmer's markets, go to the beach and be outside, and I want to be proud that I'm doing something a little more responsible. Plus, somebody needs to take care of the kids while my wife is in rounds at the hospital.

The worst part of starting a hedge fund is the client base. I don't care that most of the people that can afford hedge funds are old white men and old white institutions. What bothers me is that I'm not allowed to sell something like this to the people like me. Unless they're worth a million bucks. And that pretty much excludes everyone like me.

But if I can get the fund operating, and I can make is self sustaining, maybe I can offer it to people like me.

So there you have it, that's why I'm doing this.

Cross your fingers that it works!