Jan. 8 (Bloomberg) -- Highbridge Capital Management LLC, the $17 billion hedge-fund affiliate of JPMorgan Chase & Co., bought a stake in an energy unit of Louis Dreyfus Group to expand its oil and natural-gas trading. Terms weren't disclosed.

The venture will be renamed Louis Dreyfus Highbridge Energy LLC and is valued at more than $1 billion, New York-based Highbridge said in a statement today. The Louis Dreyfus unit trades, stores and transports fuels including natural gas and heating oil.

Investors are piling more money into energy after oil prices surged to a record last year. Investments in all commodity indexes may rise to $110 billion this month from $70 billion in November, according to estimates by Goldman Sachs Group Inc.

``We concluded it would be an incredibly arduous task, given the barriers to entry, to start an integrated merchant energy business,'' Glenn Dubin, who founded Highbridge with Henry Swieca in 1992, said in an interview. Highbridge started talks with Paris-based Louis Dreyfus, which is closely held, in April 2005, he said.

Owning physical assets such as pipelines and storage facilities is crucial to investing in the energy business, said Dubin, 49. ``That gives you a very important information advantage. You're not just screen-trading financial products.''

Balancing Risks

The new business will be based in Wilton, Connecticut, and have offices in New York, Houston, Calgary, Geneva, Shanghai and Singapore.

Highbridge said energy investments will help balance risk because they don't move in lock-step with its other trading strategies, which include bonds, convertible equities and bets on companies going through mergers and acquisitions.

Highbridge's flagship multistrategy fund, Highbridge Capital Corp., returned 24.7 percent after fees in 2006, compared with 15.7 percent for the benchmark Standard & Poor's 500 Index including dividends. Highbridge has returned 15.5 percent net of fees annually since inception.

New York-based JPMorgan, the third-largest U.S. bank after Citigroup Inc. and Bank of America Corp., bought a majority holding in Highbridge in September 2004, when its assets were $7 billion. JPMorgan began to expand its energy trading in 2005 to help ease the investment bank's dependence on bond market revenue.

Amaranth Profit

The bank bought positions from collapsed hedge fund Amaranth Advisors LLC last year. It sold half of those positions to Citadel Investment Group LLC for $725 million less than two weeks after the purchase.

The Highbridge-Louis Dreyfus joint venture may expand into electricity production, Dubin said. ``Having a power capability would be the next logical step, to be fully represented in hydrocarbons.''

Investing in physical assets of the energy business requires a level of capital only a few energy-focused hedge funds have, said Peter Fusaro, co-founder and principal of New York-based Energy Hedge Fund Center, which tracks investments and consults to fund managers. Only about a dozen of the 560 funds it follows have more than $1 billion in assets, he said.

The electricity-generation business is even riskier than storing and transporting fuel, Fusaro added. ``That's going to take even more capital. You better have good partners.''

Swings in oil prices have brought profits for traders such as Goldman Sachs and Morgan Stanley, Wall Street's two largest firms in the commodity markets. Each bank generated $2.5 billion in revenue from energy and commodity trading last year, according to estimates from London-based Coalition Development, an adviser to the financial services industry. Oil, which reached a record $78.40 a barrel in July, slumped to $56.31 a barrel last week.

Hedge funds are largely unregistered pools of capital that let managers participate substantially in gains on investments. Hedge funds globally control more than $1.3 trillion, more than double the figure five years ago, according to Hedge Fund Research Inc. in Chicago.

Shares of JPMorgan rose 16 cents to $47.95 at 4 p.m. in New York Stock Exchange composite trading. They've gained 18 percent in the past year, compared with a 9.5 percent increase by the Standard & Poor's 500 Index.

To contact the reporters on this story: Saijel Kishan in London at skishan@bloomberg.net; Jenny Strasburg in New York at jstrasburg@bloomberg.net

Last Updated: January 8, 2007 16:04 EST