Popularity of Energy Hedge Funds Grows

Nov 18 2005 | 8:49pm ET

The energy market has been the darling of Wall Street traders this year, with firms such as Goldman Sachs and Morgan Stanley making a killing on their proprietary trading desks. So it's no surprise that savvy hedge fund managers have been getting in on the action, and more are likely to do so in the coming months.

"The market is back, but back in a different way," said Peter Fusaro, chairman of Global Change Associates, a New York-based energy risk advisory firm. "Basically, we have had the exiting of electric utilities and we have seen energy commodity hedge funds come onto the market."

Fusaro, speaking at a fund-of-fund conference this week, told attendees that there has been an explosion of interest in energy hedge funds over the last 18 months, and that there are now more than 440 of them. These funds are interested in oil, gas, power, coal, debt, distressed assets and alternative energy, he said.

"While hedge fund returns [averaged] 8% last year, the energy markets returned 15% to 100%," he said, though he warned that these types of returns were not sustainable. He said that while hedge funds add volatility to the energy markets, it is precisely the high volatility of the markets that attracts them to energy in the first place.

Gary Vasey, vice president of trading and risk management at UtiliPoint International, who also spoke at the conference, attributes the high price of oil to massive underinvestment in the global petroleum industry, specifically in refineries. "Twenty years of underinvestment is resulting in today's high prices," he said.

Fusaro concurred. "We are not running out of oil. What has happened is that all of the low-hanging fruit is gone," he said. "It takes more money to get to the natural resources."

Vasey and Fusaro, who are co-founders of the Energy Hedge Fund Center, an online community that tracks and reports on funds in this sector, said that hedge funds are also taking a keen interest in non-traditional energy markets, such as carbon emissions trading, weather derivatives and water.

"We are tracking nine alternative energy funds," said Fusaro. "The green market is emerging. It's very illiquid, but it's growing." 


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