Hedge Fund Gains Powered by Nordic Electricity: Energy Markets
Arctic weather, water shortages and halted reactors drove Nordic power prices to the biggest monthly gain in three years, boosting profits at hedge funds investing in European energy markets.
Electricity across four Nordic countries for the next quarter jumped on Dec. 13 to its highest level since 2006, after advancing 27 percent last month. The surge gave Nordic Power Trading F.M.B.A. a 29 percent return in November, while Norwatt Energy AS’s fund rose 6.6 percent, topping a Bloomberg survey this week of nine funds that together manage at least $268 million.
“When there’s high volatility, I earn money,” said Bjarne Walbech, owner and fund manager at Nordic Power Trading. “You can bet it is going to be a really volatile winter because of the lack of water,” he said in an interview from Kolding, Denmark, declining to provide details about his strategy.
Scandinavian temperatures dropped as much as 7 degrees Celsius (12.6 Fahrenheit) below seasonal norms last month, the biggest deviation in the Northern Hemisphere, according to the Swedish Meteorological and Hydrological Institute. The weather reduced rain and snow available for hydroelectric stations.
Electricity for delivery next quarter in Norway, Sweden, Denmark or Finland reached 79.05 euros ($106.19) a megawatt hour on Dec. 13 on Nasdaq OMX Group Inc.’s commodities exchange in Oslo, the highest since August 2006. It has since dropped 14 percent to close at 67.85 euros today.
“If we have one or two more weeks of this weather, we can go through the 100-euro mark,” said Peter Fritsche, chief executive officer at NE Capital Management, which buys and sells for the Aalborg, Denmark-based Neas Power Fund, speaking on Dec. 13 before prices dived.
Norway relies on hydropower, the cheapest form of electricity, for almost all its needs, and Sweden, 50 percent. The amount that can be generated from current rainfall and snowmelt is about 45 terawatt hours less than normal for the time of year, according to Jonas Almquist, managing director of Bergen Energi AB in Stockholm, a broker for industrial clients. The deficit exceeds all of the power that Denmark consumed in 2009, which was 34 terawatt hours.
Norwegian and Swedish hydro power supplies fell last week faster than their average pace, according to data today on the Nord Pool Spot AS exchange.
Idled nuclear reactors at Vattenfall AB’s Ringhals plant on Sweden’s west coast and at E.ON AG’s Oskarshamn facility on the east coast also cut supplies last month.
“What we saw early was that the hydro deficit got worse and worse, and that made us very, very bullish,” Fritsche said. The Neas fund is up 6.5 percent in the first 10 days of December, according to Absolute Return Partners LLP, a London- based marketer.
Success in the Nordic power market requires “good analysis of the market fundamentals, and traders that are adaptable” to manage the volatility, said Tom Sargent, director of power and emissions trading at E.ON Energy Trading SE. E.ON, Germany’s biggest utility, also generates electricity from hydro and wind in the Nordic region.
“More than ever, you can’t use what happened last year,” as guidance, Sargent said in an interview yesterday in Dusseldorf. “The situation is constantly changing.”
Hedge funds are mostly private pools of capital whose managers participate substantially in the profit or losses from speculation on whether the price of assets will rise or fall.
At least six speculating in European energy markets closed in the first half of the year in part because of stable prices. Robert Dudley, the chief executive officer of BP Plc, said in a Nov. 2 interview that he was shrinking trading at Europe’s second-largest oil company because a lack of volatility made buying and selling commodities less profitable.
Shepherd Energy AB in Stockholm returned zero last month, as one of three funds in the Bloomberg survey that didn’t benefit from the rally in Nordic electricity.
“Many people didn’t count on such an early winter and missed the strength of the rise, including us,” said Mattias Hellberg, a fund manager at Shepherd.
The median gain for hedge funds trading European power in November was 2.7 percent, according to the survey. That compares with a 1.5 percent decline, the most since May, for all types of hedge funds worldwide, according to the Bloomberg aggregate hedge fund index, which tracks 2,627 funds. The Thomson Reuters/Jefferies CRB Index, a basket of 19 energy, metals and farm products, rose 0.25 percent last month.
Nasdaq OMX’s commodities market, where 55.5 billion euros of power was bought and sold in the 11 months through November, is also profiting from winter weather. Last month’s price jump reversed a trend of declining volume, Geir Reigstad, head of Nasdaq OMX Commodities, said in an interview in London.
Trading in September was “really, really silent, and suddenly the reaction came in November,” he said. Volume rose 42 percent to 119.7 terawatt hours in November from October. Business has yet to the match the 124.7 terawatt hours that traded in November 2009, according to exchange data.
Temperatures will remain colder than average in January in most of the Nordic region, limiting precipitation, WSI Corp. said Nov. 22. February will probably be warmer than average, according to the Andover, Massachusetts-based weather forecaster, which has more than 200 energy clients.
Nordic power is trading higher than German peakload, meaning electricity is being exported north into Scandinavia, said Hellberg. More gains may make it profitable to switch on oil-fired generators, the costliest form of making electricity, he said.
German peakload prices for delivery in two days rose as much as 19 percent today, partly after workers at RWE AG, the country’s second-biggest utility, said they will strike and reduce power output.
“We missed the initial gain in November, but fundamentally speaking, it was completely correct” that prices should rally, he said by e-mail. Plenum forecast prices will remain volatile and jump if the unusually cold weather persists.
“It’s shaping up to be an exciting season for the Nordic power market,” said Walbech at Nordic Power Trading, who left Dong Energy A/S, Denmark’s biggest utility, in 2007 to start his own trading firm. “Prices will go up and down really fast.”
The following table shows confirmed or estimated returns for European energy hedge funds, provided by data supplied to Bloomberg from fund managers and from company websites.
Fund Name Net Return Through Nov. Jan.-Nov. Nordic Power Trading +29% +76% (1) Norwatt Energy + 6.6% -10% Neas Power Fund + 5.9% + 2.6% Interkraft Energy Fund + 4.8% - 1% Markedskraft Elexir + 2.7% - 7.2% Cumulus Energy Fund + 2.0% n/a (2) Shepherd Energy Fund 0% - 3.6% Plenum Power Surge -1.3% +14% Adapto Energy Fund -2.7% - 1% (3)
Notes: (1) Nordic Power Trading started trading in February. (2) PCE Investor Ltd.’s Cumulus Energy Fund declined to provide 11- month returns. (3) Adapto Energy Fund started trading Jan. 18.
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