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Energy Hedge Funds Close After Investor Withdrawals

Date: Friday, July 2, 2010
Author: Lars Paulsson, Bloomberg

Energy hedge funds in Europe are collapsing after investor withdrawals forced managers to scale back bets amid sliding prices for oil, coal and electricity.

At least six funds managing more than $158 million shut in the first half, including four in May and June, according to data compiled by Bloomberg. London-based Rampart Capital LLP succumbed after failing to reach “critical mass” within nine months of opening, according to Chief Investment Officer Marcello Romano.

The funds were battered after Brent crude fell in May by the most since November 2008 and German power had its fourth monthly drop this year. The average loss from January through May for global energy funds was 19 percent, according to a June 10 report from JPMorgan Chase & Co., compared with a 0.9 percent gain for Hedge Fund Research Inc.’s main index of more than 2,000 members.

“The industry is limping,” said Fredrik Adolfson, a 43- year-old manager for Stockholm-based Adapto Energy Fund, which started on Jan. 18 and returned about 3 percent through June 30. “Risk capital has dropped off radically.”

Liquidations around the world rose to about 240 in the first quarter, compared with 165 in the previous three months, Chicago-based Hedge Fund Research reported June 8.

Energy Capital Management BV in Amsterdam shut its MMT Energy Fund in May after failing to achieve targeted returns since March 2009, Chief Executive Officer Marcel Melis said in an e-mail interview.

‘So Many Funds’

Orkla Finans AS’s 85 million-euro ($104 million) Energy Fund made a “strategic decision” to close last month following a 12 percent loss this year, Yngve Torvanger Jordal, the Oslo- based head of hedge-fund products, said in a June 16 interview.

“I certainly can’t think of a period when so many funds in the sector called it a day,” Fraser McKenzie, head of research at 47 Degrees North Capital Management Ltd., said in an interview. McKenzie’s company, based in Pfaeffikon, Switzerland, is a fund of funds with investments in energy.

About 30 funds are actively trading European energy markets after the latest round of closures, according to investment- adviser Energy Alpha Strategies Ltd. in London.

Boom times for most European energy funds ended in 2008, when a six-year rally in fuel prices gave way to the worst recession since the Great Depression.

Brent lost 24 percent May 3-25, erasing its first-half rally and trading as low as $68.15 a barrel in London. European coal for 2011 slid as much as 13 percent in the May 4-19 period to $92 a metric ton, while German 2011 power, a regional benchmark contract, dropped 8.8 percent May 10-20 to as low as 50.60 euros a megawatt hour.

Better-Performing Assets

Investors withdrew from energy funds in favor of better- performing assets. The Standard & Poor’s 500 Index gained 23 percent in 2009, while gold rose 24 percent and copper surged 139 percent.

The Reuters/Jeffries CRB index of 19 commodities climbed 23 percent last year. Hedge funds investing mainly in European energy lost 2 percent, according to a Bloomberg survey of 13 funds, down from a profit of 4.3 percent in 2008.

“The stock markets were doing well, and people wanted to move their investments to other areas,” said Mikkel Storm- Jensen, manager of Norden Absolute Energy, which closed Feb. 8. Oslo-based Norden, a partnership set up with Swiss utility AGL AG, lost 2.7 percent in 2009.

Funds that bet correctly on energy-markets included Plenum Investment Ltd.’s 80 million-euro Plenum Power Surge fund, which rose 15 percent this year through May. Former Goldman Sachs Inc. oil trader Gilbert Saiz delivered a “positive performance” for his Vector Commodity Fund in June, its first month of trading, Erik Serrano Berntsen, a partner at Energy Alpha who markets the fund, said by e-mail.

Arctic Bet

Plenum was up as much as 19 percent in the first two months of the year after predicting that Arctic weather would push Nordic power prices higher, investment manager Henrik Wennberg said in a phone interview from Zurich. After redemptions last year, 2010 has been “stable or slightly positive,” he said. The firm still closed its Power Fund on March 31.

NEAS Power Fund started trading in October last year and gained 6.8 percent through May, said Nick Rees, a partner at investment manager Absolute Return Partners LLP in London. PCE Investor Ltd.’s Cumulus Energy Fund gained 68 percent last year and doubled its assets in the past 12 months, said Steve Brosnan, London-based head of risk, declining to disclose 2010 returns.

Valartis AG in Zurich shut its European Energy Fund in May after starting in October 2006, according to a June 2 e-mail from administrator Custom House Fund Services (Chicago) LLC.

‘Weeding Out’

“The recent closures represent an overdue weeding out of funds that had failed to gain critical mass in intellectual capital, investor capital and manager capital,” said Serrano Berntsen. “It’s not symptomatic of the whole industry.”

Melis at MMT in Amsterdam aimed to profit on discrepancies between prices in different regions as well as electricity and fuels. While MMT peaked with assets of more than $100 million last year, the relative-value strategy wasn’t effective for European energy markets in the past 14 months, Melis, 41, said in a May 26 letter to investors.

“While there has been volatility in a directional sense, the spreads normally traded by hedge funds have actually not been that volatile,” leaving funds using the strategy with difficulty in generating returns, said McKenzie at 47 Degrees.

MMT dropped 5.4 percent in the four months through April after sliding 7.4 percent last year, Bloomberg data showed. It gained 10 percent in 2007 and 24 percent in 2008.

‘Challenging Market’

“This is the most challenging market environment for me in the past decade,” said Melis, who began trading energy in the 1990s and started MMT in 2006 after working at BP Plc and Reliant Energy Inc.

Rampart’s Romano, former head of European gas trading at Enron Corp. and co-founder of Foundation Energy Ltd., closed his fund in the last week of May.

“We tried to raise money for two years and it was a journey of broken promises,” Romano, 40, said in an interview in London. “We weren’t able to get to the scale we wanted to be.”

To contact the reporter on this story: Lars Paulsson in London at lpaulsson@bloomberg.net