The development of investment markets to trade water supplies can do much to alleviate the growing global scarcity of clean water, a report by hedge fund experts has found.

The report, by researchers at Man Investments, a global leader in hedge funds, calls for greater privatisation of water assets. While acknowledging that such a move is controversial, it says privatisation will generate capital, urgently needed to improve infrastructure.

As water becomes increasingly scarce in many parts of the world, opportunities arise for investment managers, including hedge funds.

Co-authors, Thomas Della Casa, head of research at Man Investments and research specialist Mark Rechsteiner, observe that water use around the world is rising faster than population growth due to urbanisation, industrialisation and dietary changes in emerging markets. Widespread pollution has exacerbated demand problems.

“Hedge funds are, in general, only now discovering the water market but they lead the investment community in this respect,” says Antoine Massad, chief executive officer, Man Investments Middle East Limited.

“In global investment terms, the water sector has been underrepresented compared with much smaller sectors, such as clean technologies and renewable energy,” says Casa.

The report finds that, in aggregate, there is enough water for the world’s populations but that distributing it is the big problem. The authors acknowledge that ethical concerns about water as an economic good need to be addressed, particularly relating to poor countries.

The report assesses the amount spent globally on water, water equipment and infrastructure at between $300 and $400 billion a year, with a long-term growth rate expected for the sector of between eight and 12 per cent. Opening up many more private investment opportunities would generate funds to better meet maintenance and development demands than under current levels of government participation.

The report also suggests that water should be priced higher to encourage more efficient use and to pay for better infrastructure.

A few investment funds, and even fewer hedge funds, are dedicated solely to water, which offers large alpha-generating opportunities

Water supplies are rapidly depleting, with some parts of China, Africa and the Middle East already short of water, the report noted.

Agriculture, using 70 per cent of the world’s fresh water, is particularly wasteful, with huge potential for savings. The water market generally includes utilities (water and wastewater), water technology (treatment, filtration, disinfection, testing), infrastructure, desalination, demand-side efficiencies and water packaging.

Virtual water trades are an option for many water-poor countries where water-intensive crops and meat are imported from water-rich countries, such as Brazil.-TradeArabia News Service