Friday, April 19, 2013

Why Do You Think They Call It The Widowmaker? "Energy Hedge Funds Caught Out in the Cold "

With the front futures up another 19 cents (4.4%) yesterday some of these folks got killed.
From the Wall Street Journal, Apr. 17:
The unusually cold spring from Dubuque, Iowa, to Rochester, N.Y., has served as a punishing reminder to some hedge funds of how volatile energy markets can be.

Natural gas, the main heating fuel for homes in the Midwest and Northeast, rallied to its highest levels since July 2011 as U.S. fuel supplies shrunk in recent months. The price surge has brought risky trades known as the "widow maker" back into vogue, as traders try to profit from the bigger price swings in gas prices created by low supplies.

Recent volatility doesn't compare with the wild moves that brought down hedge fund Amaranth Advisors LLC in 2006. But for the first time in years, traders are being squeezed by the popular, seasonal wager among veteran traders that gas supplies will become more plentiful as the weather warms up.

As natural-gas prices notched up unseasonal gains, the value of funds managed by Copperwood Energy Trading Advisors LLC and Skylar Capital Advisers LP fell by more than 10% in March, according to people familiar with the funds' results. Other gas funds also have had losses, according to these people.
Mitch Ackles, a spokesman for Skylar, said Skylar's traders "are meeting their goals in terms of growing the firm, and investors are satisfied with the firm's progress.…It's early days." Copperwood declined to comment.

Skylar and Copperwood are run by former lieutenants of John D. Arnold, the billionaire Houston trader who made his fortune betting on price swings in gas, first at Enron Corp. and then at his own firm, Centaurus Energy Advisors LLC. When Mr. Arnold retired in 2012 and closed Centaurus, former colleagues quickly raised hundreds of millions of dollars from investors. As of October, the latest figures available, Skylar managed $102 million of assets, according to a securities filing. Copperwood said in a November filing that it had $743 million in assets under management.

Natural-gas funds often use spread trades, which are wagers on the price difference between two futures contracts. Certain bets on a widening or narrowing price gap between different gas futures contracts are often referred to as "widow makers." At some points in the year, particularly in the spring and fall, these wagers can move sharply against investors as unpredictably as changes in the weather.

While it is unclear how specific natural-gas funds were positioned, a possible trade could involve contracts for April delivery this year and next. For such a trade to profit, gas for near-term April delivery would have to perform worse than gas slated for April 2014 delivery....MORE
We've mentioned the trade a few times. In late December it was "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)
And last June:
Natural Gas: The Widowmaker
Yeah, the swings can be dramatic.
You'll note we don't do a lot of forecasting on storage injection report day. We'd like our readers to survive to visit us again....
Yesterday was storage report day.