Hedge Funds Get Buzz, But Hardly Dominate Energy Trade

By Leah McGrath Goodman
Of DOW JONES NEWSWIRES
878 words
7 February 2005
15:08
Dow Jones International News
English
(c) 2005 Dow Jones & Company, Inc.

NEW YORK (Dow Jones)--For all their buzz, it turns out hedge funds likely aren't dominating energy trading as much as some industry observers think.

While the number of hedge funds appears to be multiplying quickly, it's still the small-fry, independent traders known as locals that account for the bulk of the volume at the New York Mercantile Exchange, which sets the tone for the world's oil markets.

That reality should put to rest the oft-stated, if misleading, notion that hedge funds and speculators have driven the long rally in oil prices, former Nymex president J. Robert Collins said.

"The concept that they could set long-term prices, irrespective of basic supply and demand fundamentals, is just not true," Collins said in an interview. "I was surprised to learn that volatility was as high as it's ever been in 1994 to 1998, when no one was blaming them for such activity."

Collins, who is starting his own energy-focused hedge fund, was privy to broad statistics on trading activity during his three-year tenure at the Nymex. Collins estimated that through June, when he left the Nymex, independent traders accounted for about half of the exchange's energy volumes, while the exchange's top 20 corporate customers represented about 25% and funds represented 15%. The balance of the activity was done by smaller exchange customers.

"The locals as a group dwarf the business of any energy company or fund," Collins said.

 
     Thin Slice 
   

The growth of hedge funds at a time of soaring energy prices has taken on political overtones. Rep. John Dingell, D-Mich., has said the impact of hedge funds on energy prices and market volatility needs to be monitored closely. In response to concerns he raised, the Federal Energy Regulatory Commission, the Commodity Futures Trading Commission and the Nymex all replied that hedge funds aren't a major source of volatility. Their comments were released Monday.

A Nymex study of the period from Jan. 1, 2004, to Aug. 31, 2004, showed levels of hedge fund activity on the exchange were even lower than those recalled by Collins. Funds generated less than 3% of crude oil futures volumes and less than 10% of natural gas volumes during that period, Nymex spokeswoman Anu Ahluwalia said.

The research, which covers only the exchange's two biggest futures contracts, doesn't include the role of hedge funds in the gasoline and heating oil pits, she said.

The exchange confirmed that independent traders push through about 50% of its energy business.

Houston-based Centaurus Energy Master Fund LP is the undisputed goliath among hedge funds trading at the Nymex. Veteran energy traders say no other fund even comes close to matching its business.

Traders said the next biggest group of fund managers include D.E. Shaw & Co. and Caxton Corp., both based in New York; Tudor Investment Corp., in Greenwich, Conn.; Campbell & Co., in Baltimore, Md.; Dunn Capital Management, in Stuart, Fla.; and AAA Capital Management Inc., in Houston.

 
     Growing Focus On Energy 
   

Very few of the world's more than 8,000 hedge funds focus primarily on energy, but a groundswell of investor interest has made them one of the fastest growing classes of funds, said Peter Fusaro, chairman of Global Change Associates Inc., a New York energy and trading consultancy.

In the past year, the number of funds focused on energy derivatives in the global market ballooned to around 60 from 10, said Fusaro, who began publishing an online directory of hedge funds in November.

"A lot of funds are in formation; I'm seeing a couple of new ones every week," Fusaro said. "We're looking at as many as 300 new funds this year."

In many cases, individual not institutional investors are providing the seed money for new energy funds. Disappointed with weak stock market returns, high-net-worth individuals - many with assets in excess of $100 million - are clamoring to pour money into new and existing funds, Fusaro said.

"These folks are pretty well capitalized," he said. "If you want to get the returns, you have to take on more risk. Energy has more risk."

While tracking hedge fund growth remains a slippery undertaking, Fusaro said the U.S. appears to be the primary wellspring for new funds of all types, with the heaviest concentrations in Chicago, Houston and the New York metropolitan area. Outside the U.S., hedge funds also are cropping up in the U.K. and Switzerland.

Collins launched one of the newest energy hedge funds on the block, MotherRock LP, in January and opened its Park Avenue office a week ago.

MotherRock, which derives its name from a type of rock in which hydrocarbons are formed, is one of an estimated 20 funds in the world investing solely in energy derivatives, Collins said.

While global hedge funds on average promise annual returns of around 8%, energy funds are reaping average returns of 20% to 40%, Fusaro estimated. Returns could weaken, though, if the market gets more crowded.

-By Leah McGrath Goodman, Dow Jones Newswires; 201-938-4378; leah.goodman@dowjones.com [ 07-02-05 2008GMT ]

Document DJI0000020050207e127000vw