As the price of oil has shown weakness recently associated with the underlying fundamentals (read storage levels), various industry pundits have been talking about record highs in 2007 including Boone Pickens. Today, as I open my email and read the news, I am reminded once again that the potential for increasing oil prices remains bolstered by geopoloitical events. Today, for example, terrorists strike oil facilities in Iraq and renewed militant attacks on crude supplies in Nigeria disrupted production. Eni SPA has declared force majeure at the Okono-Okpoho offshore oil field in Nigeria also. OPEC is considering another production cut too. Forecasting the price of crude oil remains impossible but nothing has really changed in the underlying fundamentals to suggest that there is sufficient supply or storage to offset disruptions caused by accidents, weather, terrorism or other events. Watch this space.

Gary Vasey

I recently returned from speaking at the Tripe Bottom Line conference in Paris, and was struck by how the metrics of clean energy fit very nicely with SRI investing. In fact, we are now seeing the SRI model chang from "charitable" investing to more sustainable business profitability investing. Thus, clean energy which is now driven by factros such as better technology, higher prices, and rising environmental concerns, and would seem to fit that sweet spot for SRI investors.

The reaction in Paris was very positive. Many European private banks, funds and high net worth individuals are looking for entry to climate change related investments. Energy, obviously being the biggest emitter of GHG, seems to be in favor for many European green investors. The rub is that they do no know the sector very well. In fact, investment banks typically focus on large market caps and may be some AIM listed microcaps, but the investment opportunity is actually much larger.

There are the OECD markets that need to shift into cleaner technologies and the developing world which can now leap frog into cleaner technologies as they grow their economies. Money is not the issue. The issue is scale and which technologies to invest in.

The clean energy technology space is just beginning. Ethanol and pv solar hype will give way to the newer technologies in battery storage, advanced IT applications married to energy management, gasification of municipal solid waste, biomass and coal. Internet related metering and advanced SCADA apps, etc. What I am getting at is that the template is vast and the knowledge base in deploying capital scarce.

SRI may be another way forward to bridge these investment gaps. Peter C. Fusaro

EHFC has expanded its shop and now offers a number of energy reports from Utilis Energy......as well as Energy Hedge subscriptions and the Directory of Energy Hedge Funds.

The Energy Hedge Fund Center (EHFC), the only online community focused on energy and environmental alternative investments, announced its intention to undertake a new study on energy and environmental hedge funds. The new study, “Trends in Hedge Funds in Energy & Environment“, will look at energy and environmental fund demographics, the classification of energy and environmental hedge funds, strategy diversification and sophistication, risk management and controls, performing due diligence on energy hedge funds, the growing universe of green funds, performance, and the broader impacts of energy and environmental hedge funds .

„It is now 2 years ago since the Energy Hedge Fund Center (EHFC) issued its ground breaking study on hedge funds entering the energy business,“ said Dr. GM Vasey, co principal EHFC. „Since then the universe of funds has grown to more than 525 pursuing a variety of strategies. The recent collapse of funds like MotherRock and Amaranth and the trading losses of October 2005 are now history but what is the future of energy and environmental hedge funds?“

EHFC’s co-principals, Peter C. Fusaro and Dr. Gary M. Vasey, completed the first ever study on hedge funds in energy two years ago alerting investors and energy analysts to the rise in interest in energy by hedge funds. That report, “Energy as an Asset Class for Hedge Fund Diversification“ is still available for purchase at the EHFC website. The duo have since co-authored the popular book ‘Energy and Environmental Hedge Funds – The New Investment Paradigm’ published by John Wiley (2006). The new report and study will utilize the EHFC’s founders inside information and knowledge of the energy and environmental hedge fund landscape to define the universe today and tomorrow.

“Energy markets have changed during the past two years and hedge funds are a big part of that change in trading as well as investment all along along the energy value chain. Our continuing research in this area is revealing new investment opportunities,“ said Peter Fusaro, co-principal of the Energy Hedge Fund Center.

The EHFC is currently seeking study sponsors and a study prospectus is available by request from Dr. Vasey or Mr. Fusaro.


About the Energy Hedge Fund Center LLC

The Energy Hedge Fund Center LLC offers analysis and consulting services in energy and environment. It also provides the only online community tracking alternative investments in energy and environment at www.energyhedgefunds.com which offers the directory of energy hedge funds as a subscription service and the popular online newsletter Energy Hedge. For more details contact Dr. Vasey at 420-774-302-950, Peter C. Fusaro at 212 316-0223 or info@energyhedgefunds.com.

The Energy Hedge Fund Center (EHFC), the only online community focused on energy and environmental alternative investments, reports that, despite the recent highly publicized collapse of a small number of energy hedge funds, such funds continue to grow in size, number and diversity. The EHFC Directory of Energy Hedge Funds currently lists more than 500 energy and energy-related hedge funds.

“Inspection and analysis of our directory shows that there are more than 175 energy and energy-related commodity hedge funds the majority of which are located in North America,” reports Dr. Gary M. Vasey, Co-Principal of EHFC. “Interestingly, recent trends suggest more rapid growth of energy commodity funds in Europe, increasing numbers of funds focused on alternative energy and an increase in the number of fund of hedge funds with a high energy component.”

The directory highlights some illuminating facts about energy hedge funds. In particular, many commodity funds continue to perform well and continue to attract assets at a rapid pace. A number of commodity funds with less than 2-years of track record are now managing more than $1 billion. Additionally, commodity funds seem more popular in Europe where there are twice as many energy commodity funds as equity-focused funds. In North America, there are more than 150 energy equity funds as compared to more then 115 energy commodity-focused funds. Additionally, there are now 24 alternative energy funds listed in the directory and 36 fund of hedge funds. An on-going trend is to pursue ‘hybrid’ strategies that are focused on the energy equity universe but deploy a percentage of capital to energy futures and options. In total, the directory lists 275 energy-specific funds while the remainder are funds that have a high percentage of exposure to energy and energy—related markets.

“Another trend that we have seen develop in energy funds is towards more exotic areas of the business such as weather derivatives, catastrophe bonds, carbon and other emissions, uranium and other metals that have a relationship with energy,” Dr. Vasey said. “Metals such as copper, uranium and platinum, for example, all have a relationship to energy and energy industry infrastructure.”

“We are continuing to see more green hedge funds launch due to interest in alternative energy and global warming issues. We expect this trend to accelerate in 2007,” said Peter Fusaro, Co-Principal, Energy Hedge Fund Center.

The EHFC Directory of Energy Hedge Funds is available by subscription at the Energy Hedge Fund Center (www.energyhedgefunds.com). Peter C. Fusaro and Dr. Gary M. Vasey are also the coauthors of ‘Energy and Environmental Hedge Funds – The New Investment Paradigm’ published by John Wiley (2006).

On August 20th, 2006, the Energy Hedge Fund Center issued a statement regarding investor risks in energy hedge funds (see post below for full details). In that statement Mr. Fusaro stated “ Energy trading markets have changed with more intraday price volatility caused by speed fund trading. Trying to use older trading strategies have failed some funds, we expect more blowups to come as many energy traders have not adapted to the new trading reality" and I said "As Peter Fusaro and I have argued in the past, energy markets are extremely risky and historical trends have broken down due to regional and/or global supply/demand tightness. There will always be blow ups in these markets and investors unfamiliar with the true risks in investing in energy will lose their money. The moral of the story for investors is simply don’t be greedy and understand and mitigate your risks. This means understanding the energy industry in some detail but it also means performing proper due diligence on the investment vehicle that you chose – especially hedge funds.” With Amaranth and MotherRock now in the rear view mirror, it seems that our warnings were timely.

But now these highly publicized losses have occurred and as energy prices slide, will investors run from energy altogether?

Selecting a hedge fund, especially an energy hedge fund, is all about performing proper due diligence and monitoring the fund through time. There are more than 500 funds involved in energy and in our view, only a small number of them have the strategies, controls and risk management in place to make money consistently in up and/or down markets. Energy is a great place for investors to be and despite increasing talk of commodities being over, this is simply not true. We are now seeing a return to a more fundamentally driven market that's all. There are some great energy funds out there too. Its all a matter of understanding what you are investing in.

Dr. GM Vasey, EHFC

The mounting trading losses at multistrategy fund Amaranth may cause repercusions throughout the energy hedge fund word. Amaranth's trading losses may have reached $4.5 billion. What they seem to have forgotten are the risk controls required in the hyper volatile North American gas markets. The collapse in gas prices in one year has brought Amaranth from hero to goat in that time period.

This is the second high profile natural gas hedge fund collapse in 2 months. The other was Motherock which went short. Amaranth went long natural gas.

The question now becomes who are the other trading parties caught in this historic gas price collapse. Gas prices yesterday were reported at $1.00 per mmbtu in the Rockies which reminds me of the late 1980s and early 1990s.

The other controversey is over weather reports. The US Weather Service is predicting an El Nino with warmer than normal winter temperatures while Weather Insight has predicted colder than normal temperatures this winter.

This actually looks like a great buying opportunity to go long nat gas if you have the stomach for it! The market is oversold and will probably trend lower near term.


Peter C. Fusaro, EHFC

As the price of crude oil declines now could be a good time to get into energy if you don't already have sufficient exposure. Fundamentals are to some extent unchanged and the supply/demand dynamic remains tight. Oil prices almost certainly will rise again in response to some unforseen geopolitical or weather issue in the coming weeks and the Iran stand off continues. Its been our thesis this last couple of years that each downward move in price is a buying opportunity and I for one don't think that has changed yet.

Gary M Vasey, EHFC

We have now added a poll for members to provide their opinions on how low the price of crude might go...visit the members section/polls to vote!

NYMEX and CME's Globex are now in the physical energy business. As big banks such as Lehman Brothers also move into this business, there will be competition for human capital. But what's going to be the impact on hedge fund trading in energy. We think that it will continue to accelerate despite the demise of Motherrock because the attraction of energy trading is still strong. Watch how the NYMEX GLobex linkage attracts more of that capital to tne energy complex.

Posted by Peter Fusaro, EHFC

Over the last 2-3 months, we notice an increasing number of energy commodity-focused fund launches in Europe. Differentiation for these funds is a focus on European energy commodity markets including electric power, carbon emissions and coal. Additionally, the mature NordPool power market is attracting more investment on the part of not just local Scandinavian funds but also larger US-based commodity trading funds.

Is this the second wave of energy hedge funds?

GM Vasey