Best Sub-$50 Million Hedge Fund: Shortlisted

The edge the Cumulus funds have in the market is derived in the main from their ability to  predict accurately the weather.

This can be seen with the Cumulus Energy Fund but is perhaps best illustrated by the Cumulus Fahrenheit Fund, says Steven Brosnan co-manager of the fund with colleague Peter Brewer.

The Fahrenheit Fund competes solely in the inter-dealer temperature futures market on the Chicago Mercantile Exchange. "But it will only make money if our weather forecasting is better than other peoples' in the timescales that we are using," Brosnan says.

That means it requires the management team using its proprietary technology to understand the temperature movements "better than anyone else".

"We are experts in structuring and managing weather derivative portfolios, with a strong focus on mitigating tail risks," Brosnan says.

Where other weather derivative funds focus on providing risk capacity to earn 'weather beta', Brosnan says the Cumulus Fahrenheit Fund runs a pure alpha strategy.

Core to that ability to differentiate is the combination of proprietary technology, fed by external weather forecasting sources, and the experience and discretionary management skills of the fund managers.

The managers identify opportunities through an open-minded assessment of possibilities from all sources. They focus on data discontinuities, global and local temperature trends, statistical distributions, global meteorological conditions, and weather forecasts.

Forecasting is not a perfect science. The Cumulus fund managers, along with the company's meteorologist Warwick Norton, have designed and developed technology that combines data to take advantage of that and using feeds from several sources, to more accurately predict the weather.

"Perfect forecasting would require infinite computing power so forecasting agencies have to choose how to focus their resources. This leads to a trade off between accuracy, detail, forecast horizon and cost," says Brosnan.

At the same time the chaotic nature of weather means it can be more useful to produce an ensemble of lower-detail forecasts rather than just a single highly detailed forecast. Accurate forecasting beyond around 10 days requires modelling of the ocean as well as the atmosphere which significantly increases the computational cost. These complexities have been structured into the technology.

"Our head of meteorology is one of very few scientists worldwide who could develop such a system, thanks to his 20 years' experience researching atmospheric physics and designing supercomputer models," says Brosnan.

The process interprets the third-party model outputs in the context of their known weaknesses and the current environmental conditions. The fund does this by using a proprietary system with a discretionary overlay.

"The fund's activities are particularly useful for investors contemplating the existence and extent of climate change," Brosnan says. "Its process includes proprietary calculations of exactly how much the globe is warming, providing a ‘price discovery' function and helping the world understand the magnitude of the issue," he concludes.

Fund facts: Cumulus Fahrenheit Fund

Full name of fund: Cumulus Fahrenheit Fund
Name of portfolio manager: Peter Brewer, Steve Brosnan
Name of investment/management company: PCE Investors
Contact information: Charles House, 5-11 Regent Street, London SW1Y 4LR (+44 (0)207 451 9635)
Launch date: 2008
Strategy: weather derivatives
Assets under management: $3.7 million in fund and $87 million in fund-equivalent in managed account (at March 31, 2010)
Net cumulative performance since inception: 12.58% (at March 31, 2010)
Annualised return: 7.10% (at March 31, 2010)
Annualised volatility: 6.04% (at March 31, 2010)
Sharpe ratio: 1.06
Share classes: US dollar, sterling, euro
Administrator: PNC
Auditor: Grant Thornton
Custodian: Goldman Sachs
Prime broker: Goldman Sachs
Domicile: Cayman Islands
Management fee: 2%
Performance fee: 20% performance fee with high water mark
Minimum investment: $250,000
Redemption/liquidity terms: monthly with 90 days' notice