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Hedge Fund Guy's New Best Friend Is Wet, Wet, Wet

Date: Friday, January 28, 2011
Author: Mark Gilbert, Bloomberg

Water is set to become hedge-fund guy’s new best friend forever. For H2O, unfortunately, the financier is likely to turn out to be what teenage girls and Hollywood gossip columnists call a frenemy.

Every time I mention the wet stuff in a Bloomberg article, at least a couple of e-mails appear from people wondering if I know of any way to “invest” in aqua. Trust me, they’re not asking out of concern for the welfare of the people of Jordan, the world’s fourth-poorest country as measured by water availability, according to Imad Fakhoury, the nation’s minister of state for grand projects.

More than 100 executives, including national presidents, gathered at the World Economic Forum’s annual meeting in Davos, Switzerland, yesterday to discuss water. There are enough hedge- fund hangers-on at the conference to suspect that at least some wangled an invite.

“Water is going to shape the path of economic growth in the countries in which we work,” says Rachel Kyte, a vice- president at the International Finance Corp., the World Bank’s private-investment arm. The IFC is embarked on “a data-driven exercise which can put investable propositions in front of private-sector leaders.”

Uh-oh. Does anyone else feel the hairs on the back of their neck start to tingle at the thought of the world of finance getting its mucky paws on the world’s most basic resource and inventing newfangled ways to speculate on Adam’s ale?

Empty Breakfast Bowls

“Water scarcity is having its impact already today in food prices,” says Peter Brabeck-Letmathe. The chairman of Nestle SA, the world’s largest food company, knows a thing or three about crops, and he’s worried. “By 2030, 30 percent of cereal production goes if we carry on at current water-usage rates. Politicians want 20 percent of energy to come from biofuels; we would have to triple food production to get there.”

Can you connect the dots between the finance industry’s thirst for derivatives that bet on the price of water, and global food production, and bread riots? I can.

Investors already bet on the outlook for the water industry, buying shares in water companies, or exchange-traded funds that invest in several companies at once. Now, the same gang that brought you the global credit crisis is itching to flex its financial-engineering skills to collateralize irrigation projects and write swaps on desalination initiatives. If you can buy and sell electricity and carbon, why not water?

Geopolitical Conflict

“A rapidly rising global population and growing prosperity are putting unsustainable pressures on resources,” the WEF said in its 2011 report on global risks. “Demand for water, food and energy is expected to rise by 30 to 50 percent in the next two decades, while economic disparities incentivize short-term responses in production and consumption that undermine long-term sustainability. Shortages could cause social and political instability, geopolitical conflict and irreparable environmental damage.”

I asked Kyte of the IFC whether she was concerned about speculators getting involved in the nascent water industry. Her response didn’t exactly fill me with confidence.

“We see increased interest across the full spectrum of financiers, from commercial banks to private equity,” she replied. “There are the normal barriers to investment: country risk, foreign exchange risk, technology risk. Most investors need instruments and intermediation to get into the business. So we have to provide tools, finding ways to share risk to get private finance involved.”

1,000 Years

Lee McIntire, chairman and chief executive officer of CH2M HILL Cos., a consulting and engineering firm based in Englewood, Colorado, reckons we know a lot about global energy supplies and almost zero about what and where our water resources are. “Aquifers take about 1,000 years to fill and 50 years to drain,” he says. In the future, “we’re probably going to have to pay for water.”

And you know as well as I do that whenever there’s a hot commodity in demand, the money crowd will find a way to ride that horse all the way to the bank.

(Mark Gilbert, author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net