Hedge Funds Warm To Weather Derivatives

Hedge funds are increasingly looking to trade weather derivatives either as a non-correlated play or as an investment strategy.

  • 21 Jan 2005
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Hedge funds are increasingly looking to trade weather derivatives either as a non-correlated play or as an investment strategy. Chicago-based Citadel Investment Group is set to join the mix and plans to start trading weather derivatives this year. It closely follows fellow hedge fund giant, D.E. Shaw & Co., which started trading weather derivatives in October, Ryan Ricker, a Kansas City-based member of D.E. Shaw's weather team. Officials at Citadel, which manages roughly $11 billion, confirmed the plan but declined further comment.

In the fall, Jeff Bortniker former ceo of XL Weather & Energy, set up Pyrenees Capital Management in Stamford, Conn. with two partners specifically to trade weather derivatives. "It's a market that has a lot of negative correlation to traditional investments like foreign exchange, interest rate and equities," said Bortniker.

Nicholas Ernst, a weather markets director with Evolution Markets, an advisory and brokerage service for environmental products based in White Plains, N.Y., said after the collapse of Enron, the weather market has become less centered around energy companies. Hedge funds are increasingly looking at weather derivatives as a means of hedging or spreading exposure, noted Ernst. Market participants who bought natural gas may buy a weather derivative to hedge against the occurrence of warmer weather. "That's a big change," he said.

  • 21 Jan 2005

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5 Barclays 226,473.92 879 5.84%

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4 BNP Paribas 27,479.75 167 5.28%
5 SG Corporate & Investment Banking 23,982.83 136 4.61%

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3 Citi 15,667.80 92 7.14%
4 UBS 15,208.47 58 6.94%
5 Goldman Sachs 13,487.36 72 6.15%