Solar energy is back in favour with hedge funds.
The sector was among the best investments in 2020 for Asia-based managers including LyGH Capital, Pinpoint Asset Management, Sylebra Capital and Zaaba Capital, helping them to beat global funds’ 9.5% average returns.
LyGH has put about a quarter of its investments into solar and power storage, said Grace Lu, chief investment officer of the Singapore-based asset manager, which oversees about US$500 million ($661.1 million) in hedge and long-only funds. Polysilicon maker Daqo New Energy Corp. was the largest profit contributor to Zaaba’s Asia hedge fund, which gained about 30% last year, said a person with knowledge of the matter.
“The growth visibility for the next 10, 20 years is very clear,” said Lu, whose fund returned 32% last year. “It is actually based on economics, because now it is cheaper than conventional energy.”
Investors have been piling in as solar becomes competitive and countries including China pledge to do more to curb climate change. They are betting the notoriously cyclical industry has moved past an over-reliance on government handouts that saw overstretched former market leaders such as Suntech Power Holdings Co. and Yingli Green Energy Holding Co. go belly up.
As the world’s leading producer and consumer of solar panels, China’s decision to cut solar subsidies in May 2018 slashed global demand and sent prices into a tailspin. Investment costs have sunk so far that the industry is now economically viable even without subsidies, LyGH’s Lu said. Unit costs of solar power generation have tumbled 86% in the past decade, Pinpoint said in a December commentary.
In September, China pledged carbon neutrality by 2060. Transforming the world’s biggest polluter could require US$15 trillion of investment, much of it in solar and wind power.
Solar was among the top five money makers in 2020 for the US$1.3 billion Pinpoint Multi-Strategy Master Fund, which returned 14% for the year. Pinpoint likes industry leaders and makers of photovoltaic glass, monocrystalline silicon and polysilicon, said Jennifer Wong, Hong Kong-based managing director of investor relations, declining to identify any specific stocks.
Trivest Advisors is also building positions in solar companies, said co-founder Xue Lan. The firm’s China-focused hedge fund is one of the largest at about US$3 billion and returned more than 80% last year, according to a person with knowledge of the matter, declining to be identified as the information is private.
“It’s one of the very few areas where the US and Chinese governments are working toward the same direction,” Xue said.
Both LyGH and Zaaba favour Daqo, whose share price has surged nearly 10-fold since mid-2020, on bets it will benefit from its low costs, capacity expansion plans and a global bottleneck in polysilicon supply.
LyGH’s top pick this year is Sungrow Power Supply Co., an inverter producer with 20% of the global market, which the asset manager expects to keep gaining share against western peers.
Enphase Energy Inc. was the largest return contributor in 2020 for Sylebra, whose technology hedge funds manage US$3.9 billion between them and returned about 50% last year. Enphase’s new battery packs allow homes to store their solar-generated electricity for use at night. This provides energy security and independence, said a person with knowledge of the matter, who asked not to be identified as the information is private.
The solar companies’ share prices have rocketed since the end of 2019, but not all the potentials have been priced in, the hedge fund managers argued.
“Solar is a really long-term theme,” said Lu, predicting prices will continue to fall as technology advances, leading to more installation.
