Monday, January 27, 2014

Natural Gas Volatility Crushed Some Big Funds

This article is in regards to 2013, the story on the last week or so won't be written until the end of the first quarter.
We talked about one of the the trades that clobbered the unwary in Apr 2013's "Why Do You Think They Call It The Widowmaker? 'Energy Hedge Funds Caught Out in the Cold '" and prior to that in "3D: Still Watching for a Double Top in Stratasys (SSYS; DDD)":
Warning:
That $8.11 range between Wednesday's high and Friday's low is 10.97%.
These are moves you see in one of the most volatile commodities, natural gas.

Trading natural gas is called "The Widowmaker".

(okay, the Widowmaker term originally came from the March-April calendar spread where the premium/discount can swing 20% based on a couple weather rumors and you might see several swings from backwardation to contango and back in a week.. Now it is used to refer to the whole darn curve and any point on it)
The lesson is the same as the first rule of minefields: If you don't know where you're going, STOP. NOW!

From Reuters:

RPT-EXCLUSIVE-Big gains for natural gas fuel big losses for hedge funds
Natural gas was the biggest gainer among commodities last year but the hedge fund that has historically led gains in the space had its first losing year, and many others were down double-digits after being on the wrong side of the market.

U.S. gas prices gained more than 26 percent in 2013, the largest rally in eight years as brutally cold weather boosted gas demand. Prices rose, and toward the end of the year, the market saw wild swings in the spread between the March and April gas contracts.

Investors suspect that natural gas hedge funds lost heavily on spread trades of the March and April contracts, after miscalculating winter and spring gas demand and price action.

Prominent funds, from the $1 billion Velite Benchmark Capital in Houston to the smaller Sasco Energy Partners in Connecticut, finished the year down about 20 percent or more, according to industry sources and performance data obtained by Reuters.

"It was a tough year without doubt for most of us. The losses were pretty broad-based," said Kyle Cooper, managing director of research at Cypress Energy Capital Management in Houston, a small $20 million hedge fund that lost 17 percent.

Hedge funds typically do not reveal their book, so it was hard to ascertain the price bets or size of the positions laid out by the gas funds, and the trades where they lost money.
It is also unclear how funds have fared in the first weeks of this year as natural gas futures prices have surged 20 percent so far this month.

Velite ended down 25 percent, according to two sources familiar with its numbers. It was the fund's first loss since its launch in 2006, and was also the most high-profile loss among gas funds. Velite was founded by natural gas trader David Coolidge, 49, who became the top natural gas fund manager after ex-Enron wunderkind John Arnold retired two years ago.
Velite declined comment.

Big price swings are not unusual in natural gas, but the fluctuating March-April spread caught even the most experienced traders by surprise. The spread, known as the "widowmaker" for sharp losses it has caused in the past, gyrated wildly in a 20-cent range in December as forecasters predicted milder temperatures and then arctic-like chills.

In December, the gap between March and April 2014 gas moved from 4 cents on Dec. 4 to 19 cents on Dec. 12, as funds expected inventories to drain by the end of the winter heating season as Arctic chills swept across the United States.

It then contracted to as low as 9 cents five days later only to blow out to 30 cents on Dec. 23, leaving ample room for winners and losers.

INCREDIBLE VOLATILITY
This year, the market has continued to surge, with front-month gas futures hitting above $5 per million British thermal units on Friday, a peak since June 2011, after some of the coldest temperatures in two decades. Next-day gas prices in New York City rose to a record above $100 per mmBtu on Tuesday.

"We're still having incredible volatility now," Cooper said. "This means we could have more big losses in January, and possibly some big winners if they got it right." He declined to say how Cypress had performed for the month so far.

Of last year's losers, Fairfield, Connecticut-based Sasco reported a 20-percent slide on a capital of $244 million, performance data obtained by Reuters showed.

Houston-based Skylar Capital, which opened with about $100 million at the end of 2012 and is run by former Arnold protégé Bill Perkins, lost about 25 percent, industry sources said.

Copperwood, also in Houston and run by ex-Enron veteran Greg Whalley, declined about 27 percent on a capital of $800 million, two market sources said....MUCH MORE