Sigma Advanced Capital Management, LLC : Carbon Neutral Alpha Program

Summary

The CARBON NEUTRAL ALPHA (“CNA”) PROGRAM is an absolute return program. It develops a risk-adjusted portfolio of the most liquid futures and spreads of the European Carbon Market Allowances (EUAs), it seeks to perform in different market environments and economic cycles. The EUAs are a unique asset class with strong bias and inefficiencies due to the market's regulatory policies, hedging pressure, weather, and supply/demand fundamentals.

Investment Strategy:

The manager deploys a Quant-mental Investment Process combining quantitative techniques like statistical modeling, machine learning, and natural language processing (NLP) with discretionary and fundamental analysis.

Climate Impact:

Sigma Advanced Capital Management LLC believes that responsible businesses need to be thoughtful, aware, and willing to act. The Carbon Neutral Alpha program seeks to have a climate impact by supporting environmental initiatives by using a percentage of management and performance fees to support REDD+ approved projects in the Amazon aligned with the 2030 Sustainable Development Goals (SDGs).

Investment Strategy

The EU ETS System:

The EU ETS is the largest multi-country, multi-sector greenhouse gas emissions trading system in the world. The EU ETS works on a ‘cap and trade’ basis, so there is a ‘cap’ or limit set on the total greenhouse gas emissions allowed by all participants covered by the System and this cap is converted into tradable emission allowances. Participants who are likely to emit more than their allocation have a choice between taking measures to reduce their emissions or buying additional allowances; either from the secondary market – for example companies who hold allowances they do not need – or from Member State held auctions. The rationale behind emissions trading is that it enables emission reductions to take place where the cost of the reduction is lowest, lessening the overall cost of tackling climate change.

The European Carbon Allowances (EUA):

EUAs emissions allowances are standardized contracts tradeable in select exchanges. Emission Certificates must be held at all times within the ‘Union Registry’ operated by the European Commission; “an electronic accounting system that ensures the accurate accounting of EU allowances issued under the EU ETS and international credits” (European Commission, 2015).

EUA's long price bias exists given the need for government policies to dramatically reduce carbon emissions. EU governments have developed ambitious emission reduction policies and annually set a linear reduction factor in the overall greenhouse gas emission allowed cap. EU government agendas are pressing for lower carbon supply and thus a long price bias. Also, the Market Stability Reserve (MSR) was introduced in 2019, to provide stability to allowance markets by limiting the effects of economic shocks and unforeseen surpluses/deficits by permitting allowances to be deposited or withdrawn from the reserve accordingly.

Risk Management

Protection is a key element in generating returns - robust risk management is at the core of this protection. Risk is actively managed through strict risk budget limits at a portfolio and individual positions drawdown limits. Likewise, the Advisor runs 95% and 99% VaR, Conditional VaR and Marginal VaR test to monitor the portfolio exposure as well as market stress tests.

Risk is monitored on a constant real-time basis through electronic platforms and internal risk management systems.