The cleantech sector soiled a lot of people's portfolios during the market crash. Then again, so did just about every other asset class. But while the sector has rebounded from the March 2009 lows, the bellwether index tracking the space hasn't kept pace with the overall markets.

The closely watched WilderHill New Energy Global Innovation Index (NEX), comprising 88 companies listed on 24 exchanges globally, gained 38.7% in the one-year period ended March 31. The index contains companies focused on renewable energy, conservation and efficient resource use.

During that period, the MSCI World and S&P 500 indexes jumped 52.4% and 49.7%, respectively.

While some publicly traded cleantech, or greentech, companies have rebounded, others remain massively below their 2007 market highs--former solar darlings Suntech Power Holdings and SunPower Corp. are painful examples-and conjure memories of the boom-and-bust days of the dot-com era.

Among many institutional players, the buzz from the peak days of the "green" movement has given way to a collective yawn.
"There's a problem here, and I'm not denying it," says Peter Fusaro, chairman of Global Change Associates in New York City, a consultant on climate change, clean technology and renewable energy. "Investor interest has lagged. In my opinion, they [fund managers] are more interested in distressed assets and the oil and gas market, which they understand a lot better than this sector."

Big investment bucks from hedge funds and private equity funds help goose the cleantech market. But only 15 fund managers participated at the 9th annual Wall Street Green Trading Summit held in late March in New York City. Two years before, the conference attracted 79 fund managers, says Fusaro, whose company organizes the event.

Fusaro believes the cleantech sector has been hurt by a variety of factors including lack of financing, a weak IPO market that doesn't provide exit strategies for investors in privately-held companies, and public companies that haven't yet grown in scale.

He says dried-up financing has hit wind power and other renewable energy sources particularly hard. "Wind has died down," he says. "How's that for a bad pun? But it'll come back."

Why is cleantech attracting less institutional interest? Fusaro says a big reason is that the United States doesn't have a carbon trading market. Carbon trading, also known as cap and trade, has been operating in the European Union since 2005. If done right, proponents say, carbon trading could fill government coffers with billions of dollars from the sale of pollution credits designed to cap carbon emissions. But Europe's system thus far has been dogged by improper execution, fraudulent claims and other problems.

Nonetheless, Fusaro and others believe regulated carbon trading is vital to cleantech because it provides a framework for carbon reductions.  
"I think it [carbon trading] is the Holy Grail for the price of carbon," Fusaro says. "Without a material price for carbon, you don't get investment dollars. Regulatory uncertainty begets financial uncertainty."

Growth Opportunities
Cleantech might be down, but it's not out. In fact, far from it, if predictions come true. According to numbers gleaned from various sources by the hedge fund Green Science Partners LP, the cleantech sector in aggregate is expected to grow 20% to 25% annually during the next five to ten years, or ten times the projected annual growth rate of 2.5% to 2.7% for the U.S. gross domestic product during this time frame, as forecast by the Federal Reserve.

Anticipated growth rates during this period range from geothermal (50% to 100%) and solar (25% to 30%) to electric vehicles (18% to 20%) and water technologies (8% to 10%).

"A lot of these sectors have gone through a boom/bust period, and certain companies will survive," says Chris Tagatac, chief marketing officer at Stamford, Conn.-based Green Science, which runs a cleantech hedge fund that's a hybrid of public and private companies. The fund's current investment minimum is $500,000 for institutional investors, but Green Science may lower that to attract high-net-worth investors. He says they're seeing increasing investor interest from family offices.

Tagatac says Green Science Partners is essentially a long/short equity fund, but investors can choose to opt into private deals that run parallel to the public side, which provides more liquidity and an ability to hedge with "green" ETFs. The private side is much less liquid, but "that's where much of the value in this space seems to reside," he says.

Tagatac says his company is most excited about electric vehicles, which it considers a misunderstood market with plenty of upside. And he notes that federal money earmarked for renewable energy spending has finally started flowing, particularly in popular areas such as wind and solar.
From an investment perspective, though, Tagatac says valuations in the wind and solar sectors are too high. "Areas like electric grid, electric vehicles, biomass and others have reasonable valuations--sometimes below cash value," he says.

Keep Those Shorts Handy
Some cleantech opportunities might not be the most obvious ones. Abby Laufer, CEO of Virid Capital, a cleantech-focused hedge fund in New York City, says that U.S. utilities could profit from greater use of electric vehicles and by playing a big role in vehicle-to-grid technology.

"Electric charging stations will be critical," says Laufer, who manages the Virid Eco Fund, a long/short, global public equity hedge fund. "This is where public companies could have a big impact."

Laufer notes that Pacific Gas and Electric Co. and Xcel Energy are two big players in this space.

Half of the Virid Eco Fund is invested in U.S.-based companies, and all companies included in the fund need at least 35% of their revenue derived from renewable energy. And short strategies play an important role.

"There are plenty of companies in this sector that can fail," she says. "But in the long-short format, we have opportunities to benefit from those failures."

Liquid Investment
One of most enduring and fundamental components in the cleantech space is water, where the interplay between population growth, economic growth and dwindling clean water supplies makes a compelling case both for new water infrastructure projects and upgrades of existing systems.
William Brennan, president and portfolio manager at Brennan Investment Management in Wayne, Pa., sees significant opportunity in China. He notes that by 2020, China will have 212 cities with populations of one million or more. This puts a lot of pressure on a country with roughly 22% of the world's population but just 6% of its available water.

"They're trying as quickly as possible to get their infrastructure up to speed, but it's a monumental task," says Brennan. His company is an RIA that subadvises the Kinetics Water Infrastructure Fund, and creates separately managed accounts for endowments, family offices and other RIAs.  
Brennan says he's tapping into the China water scene through Chinese water-related companies listed on U.S. exchanges.

The key themes underlying the Kinetics Water Infrastructure Fund are fourfold:  Water utilities and related infrastructure primed to cash in on the global push to modernize the pipes and systems that deliver water; filtration and purification, which comprise membranes, treatment plants and desalinization; irrigation, an important focus considering that agriculture consumes huge amounts of water; and water rights, which is a big issue in the western U.S. and in Australia.

Brennan is particularly keen on the utilities and infrastructure theme. He expects publicly traded utilities to be in the sweet spot because many cash-strapped municipalities can't afford to upgrade their water systems and he expects a lot of them to sell their assets. "Publicly traded utilities will be there with a catcher's mitt saying, 'Throw that fast ball because we're the only ones who can catch it,'" Brennan says.

From an investment perspective, Brennan says utilities have underperformed the overall market for the past 18 months or so, and the group recently traded at discounts not seen in 15 years (based on a return on their net regulated asset base).

Before their recent underperformance, Brennan says the U.S. water utilities group returned almost 800% between 1999 and 2008, based on a basket of utilities that have operated continuously during the past 20 years.

To pay for expected water infrastructure upgrades in the U.S., Brennan expects consumers will ultimately pay the freight through rate hikes of as much as 15%. And that could make utilities a compelling investment, thanks to a combo of guaranteed rate hikes and fat dividend yields that recently averaged 3.35% for the group.

If Brennan's thesis pans out, at least people who are invested in water utilities could get a little relief from those higher water bills.