ALTERNATIVES - Green Means Go, Go, Go

Are there second acts in American lives? Ask Fred Kittler, co-founder of Velocity Technology and Communications Fund, a hedge fund focusing on the high-tech sector that in 1999 was up 262 percent, after fees.

Kittler believes a relatively new investment sector called cleantech is about to take off, and with it the returns of his new hedge fund, five-year-old Firelake Capital Management, based in Palo Alto, California. Its Firelake Strategic Technology Fund is one of the first hedge funds to embrace cleantech -- a category of alternative technologies in energy, water, transportation and manufacturing that deliver environmentally friendly products at lower costs than do current offerings. Of the 40 companies in Firelake's portfolio, 15 belong to the cleantech sector -- investments in privately held companies that Kittler believes have the potential to deliver enormous returns when they go public or are acquired. To balance the risk of such early-stage investments, the bulk of the portfolio is allocated to publicly traded infotech stocks.

Kittler, 57, took a similar investment approach in Act One. In 1996 he and partner Andy Kessler, 47, both former securities analysts, launched Velocity Technology and Communications Fund, which also invested in private and public companies. The fund's returns, aided by the '90s technology bubble, were fueled by investments in private companies, such as Seattle-based software company RealNetworks, maker of the popular RealPlayer media program.

By taking a hedge fund approach to early-stage investing, the pair were able to make bets on speculative companies that looked promising without having to make the lengthy commitments of traditional venture capital investors. To offset this risk they invested most of the portfolio in publicly traded technology stocks. The duo parlayed $100 million into more than $900 million before starting to sell off the portfolio in November 2000. By September 2001 they had completely liquidated the Palo Alto, California­based fund.

Kessler does not appear in this second act, though he is an investor in Firelake. In his place is Firelake's co­managing director and co­portfolio manager, Martin Lagod, a Silicon Valley lawyer-turned-venture-capitalist. Lagod, 51, picks promising start-ups to back and then finds venture capitalists to sit on their boards and advise the companies.

Kittler says he chose to focus his new hedge fund on cleantech partly because "it was a big and important new field" that Wall Street did not understand. That's changing. Last year North American and European venture capitalists poured a record $3.6 billion into cleantech, up from $1.7 billion in 2004, according to Brighton, Michigan­based research firm Cleantech Venture Network.

Firelake's biggest holdings of publicly traded high-tech stocks include Morrisville, North Carolina­based Harris Stratex Networks, a supplier of wireless transmission systems; and Mountain View, California­based semiconductor maker NetLogic Microsystems, which designs chips used for rapid access to the Internet, yet outsources their manufacture.

"Because we had a portfolio of publicly traded companies, we could take our time finding really good private cleantech start-ups," says Kittler. He and Lagod started small in 2002, with $18 million in assets from friends, family and former Velocity investors. Firelake today manages $234 million; when the portfolio's value reached $200 million, Kittler closed it to outside money.

Firelake's strategy is to invest small and wait for high returns, says Kittler, who notes that its long-run approach to investing differentiates it from traditional hedge funds. It can short stocks but does not use leverage.

The fund's cleantech holdings include companies like Pittsburgh-based Plextronics, an electronics manufacturer that makes photovoltaic cells -- materials that convert sunlight into electricity -- out of plastics; and Ann Arbor, Michigan­based Sensicore, which makes microsensors that can test the purity of water within minutes.

Cleantechs count major utility companies among their clients -- customers that tend to be slow in adopting new technologies. "Moving into this space requires understanding the regulatory drivers as well as the traditional business drivers," cautions Joseph Desmond, a veteran of the alternative-energy industry who serves on the California Energy Commission under Governor Arnold Schwarzenegger. He believes getting old-guard utilities and visionary entrepreneurs on the same page will be challenging.