Nordic Commodity, ECM Post Top Power Hedge-Fund Gains

By Lars Paulsson

Aug. 22 (Bloomberg) -- Energy Capital Management and Nordic Commodity Funds AB's hedge funds are outperforming the competition in European energy markets, where power prices fell as much as 17 percent last month from a record.

Energy Capital's MMT fund returned 19.2 percent through July, according to a letter to investors, the best result in a Bloomberg survey of 11 funds in Europe's electricity, coal, natural-gas and emissions markets. Alfakraft AB's Alfa Energy Fund posted the biggest drop, at 17.9 percent, according to its Web site.

The plunge in power prices and related commodities since early July ended a four-year surge in electricity costs that enabled funds to provide better returns than stocks and bonds. Coal costs, which affect European power markets, more than doubled in the first half, before sliding 13 percent in July.

``It was difficult to predict the market, with big swings in coal prices and weather patterns,'' said Fredrik Bodecker, managing director of Nordic Commodity Funds in Stockholm, whose Nordic Power Fund rose 16.6 percent through the first seven months of 2008.

German power for delivery in 2009, the benchmark contract, had its biggest price fluctuations in two years in July and was down 6.5 percent yesterday from its record. On July 23, 10-day volatility was as high as 42.8 percent, according to data compiled by Bloomberg. Volatility is a gauge of price swings during a specific period, expressed as an annual percentage.

Nordic Market

In the Nordic market, the most actively traded quarterly power contract slid 8.1 percent on July 2, its biggest one-day decline. The price reached a record a day earlier.

Alfakraft, Nordic Commodity Funds and Norden Absolute Energy Management ASA all target annual returns of 15 percent to 25 percent, while Shepherd Energy aims for 15 percent to 20 percent, according to the funds.

The MMT Energy Fund ``is capable of 30 percent plus returns in a good year,'' according to Energy Capital Management's Web site. Chief Executive Officer Marcel Melis declined to comment.

``It's possible if you've had a lucky streak, but funds with returns of 15 to 20 percent this year will be few and far between,'' said Gary Vasey, general manager for Europe at Utilipoint International Inc., an energy market consultant. Vasey is also founder of New York-based Energy Hedge Fund Center LLC.

Power Funds Beat Others

Gardner Finance AG's PowerMacroIndex, which pools the performance of eight electricity hedge funds, was up 6.55 percent through June, compared with 21.2 percent for all of 2007. Data for the year through July wasn't available.

Power funds are beating the average hedge fund. The typical global hedge fund dropped 3.5 percent this year through July, according to Chicago-based Hedge Fund Research Inc. Last year they gained 10.2 percent. An investment tracking the Standard & Poor's 500 Index declined 13 percent this year through Aug. 20.

Power and utility funds are part of the $70 billion managed by commodity hedge funds, according to Cole Partners Asset Management LLC in Chicago, an investor in the industry.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets and participate substantially in profits from money invested.

Nordic Commodity's Bodecker plans to increase the Nordic Power Fund at least 10-fold to 200 million to 300 million euros ($446 million) by the end of next year. He may start a second fund for German power, gas, coal and emissions this year, targeting 25 million euros to 30 million euros.

Increased Risks

The Nordic Power Fund posted its biggest gains of 10.38 percent in February and 6.28 percent in June.

``We increased the risks when we started to make money,'' Bodecker said.

Climbing coal costs caused by rising demand in Asia and production bottlenecks in Australia were among the main drivers of European power prices this spring, fund managers said.

``The market has generally been very choppy and difficult,'' Peter Brewer, chief investment officer at PCI Investors Ltd. in London, said in an interview. The company's Cumulus Weather Fund lost 8.8 percent in the six months through June, according to a letter to investors. Brewer declined to comment on the performance.

Coal prices in northwest Europe have tumbled 12 percent since a July 1 record and are up about 80 percent this year.

``They've added a new dimension to the Nordic power market that traders need to take into account,'' said Bengt Lindblad, managing director at Alfakraft in Stockholm. ``Coal and oil prices will continue to be volatile.''

Oil Volatility

Oil prices influence power because of their link to natural gas, the fuel used to generate 20 percent of the European Union's electricity. Crude oil futures on the New York Mercantile Exchange have declined about 17 percent since trading at a record $147.27 a barrel on July 11.

``We expect continued high volatility in the power markets due to the instability of oil,'' Energy Capital Management said in an investor letter detailing July's return of 5.9 percent, its 12th consecutive monthly gain.

Fund Name                          Net Return Through July

MMT Energy Fund                        19.18%
Nordic Power Fund                      16.6%
Plenum Power Fund                      13.36%
Shepherd Energy Fund                    6.34%
Norden Absolute Energy Fund             5.93%
Electris Energy Fund                    1.76% THROUGH JUNE
Interkraft Energy Fund                  2.24%
Valartis European Energy Fund           0.66%
Markedskraft Elexir                     0.04%
Cumulus Weather Fund                   -8.8%  THROUGH JUNE
Alfa Energy Fund                      -17.9%

To contact the reporter on this story: Lars Paulsson in London at lpaulsson@bloomberg.net