Best Energy or Commodities Hedge Fund: Winner

The ability to predict the weather accurately, consistently and reliably is what gives the energy futures trading fund Cumulus Energy Fund its edge in the market, say fund principals Peter Brewer and Steve Brosnan.

According to them by concentrating on specific weather outcomes that are important to energy trading, like temperature, rainfall and wind, all of which are large influences in the power markets, they have created a sustainable edge.

The managers describe Cumulus Energy as "a high-octane fund" as it targets a 45% return a year. It specialises in near-term power and gas as the most rational contracts to trade, the managers say, as storage limitations force price to converge on fundamental value.

They trade the European markets because that is where they have the deepest understanding of the system, risk factors, market rules and trading behaviour.

The company takes forecasts from various third party providers and uses its proprietary system to combine these into an in-house forecast concentrating on the weather aspects which are important to energy supply and demand.

A related system takes that weather output and predicts supply and demand, taking account of a number of other variables. The system gives a lot of opportunities for trades, according to the managers. They use a discretionary process to select the ones that will give the best risk reward ratio in those particular conditions.

This combination of proprietary fundamental models, superior interpretation of weather forecasts and detailed knowledge of the weather sensitivities of energy supply and demand, all of which have been developed over many years, gives the fund its edge in the market and raises substantial barriers to entry as well as ensuring sustainable returns, according to the managers.

Trading opportunities in the market are increasing as greater use is made of green energy generation in the form of wind power, hydro-electric and solar power. Power and gas demand have always been weather dependent. For example, people would use their heating when it was cold and air conditioning when it was hot.

Now the supply of electricity in Europe is very weather dependent, too. In addition energy demand is different every hour of the day. European energy markets settle every hour or half hour depending on the country.

Because the energy cannot be stored, the markets have to clear every hour. This means supply and demand is dependent on the weather and little affected by sentiment. This gives Cumulus Energy the "perfect market for our edge", say the managers.

Peter Brewer founded Cumulus in 2005 after a career analysing the effects of weather on energy companies in particular. He was joined by Brosnan, head of risk, and meteorologist Warwick Norton.

They run two funds. The second fund is the Cumulus Fahrenheit Fund. Both funds use PCE Investors' hedge fund platform to provide the infrastructure needed to support the operation, including compliance, IT and middle office. This allows the managers to focus on the management of the fund.

Fund fact box: Cumulus Energy Fund

Full name of fund: Cumulus Energy Fund
Name of portfolio managers: Peter Brewer and Steve Brosnan (head of risk)
Name of investment/management company: PCE Investors
Contact information: Charles House, 5-11 Regent Street, London SW1Y 4LR (+44 (0)20 7451 9635; www.pceinvestors.com)
Launch date:  September 1, 2006
Assets under management: $81 million (at 31 March 2010)
Net cumulative performance since inception: +114.83% (at 31 March 2010)
Annualised return: 24.42% (at 31 March 2010)
Annualised volatility: 24.97% (based on weekly returns) (at 31 March 2010)
Sharpe ratio: 0.86
Strategy: energy futures
Share classes: US dollar, euro, sterling
Administrator: PNC
Auditor: Grant Thornton
Prime broker and custodian:  Goldman Sachs International
Domicile: Cayman island
Management fee: 2%
Performance fee: 20% subject to high water mark and from April 1, 2010 up to 66% of performance fee will be refunded against subsequent losses (clawback)
Minimum investment: $250,000
Lock-in: none
Redemption/liquidity terms: monthly with 30 days’ notice