Bloomberg News

Power Hedge Funds Suffer Rout as Nordic Price Trends Ease

February 12, 2013

Almost every hedge fund specializing in Nordic power posted losses last year as surplus water for generating energy kept prices oscillating in a narrow range, confounding expectations for a steady retreat.

Energy Invest and Power Focused, run by Gjoevik, Norway- based Norwatt AS, slid 17 percent and 15 percent respectively, the most among eight funds with at least $157 million invested in Nordic electricity. Seven of the eight posted negative returns, generating a median loss of 11 percent, compared with gains of 0.8 percent in 2011 and 13 percent in 2010, according to a survey of managers by Bloomberg.

Power traders from Oslo to Stockholm fell short of their own forecasts that assets would increase as much as 20 percent and trailed other commodity funds amid the biggest surplus of water since 2007. Prices swung between 36.10 euros ($48.43) and 43.10 euros per megawatt-hour in 2012, about half the range in 2011, according to Nasdaq OMX Group Inc. prices on Bloomberg.

“The biggest thing in 2012 was that the hydrological balance changed very little, there was a surplus almost all year,” said Mathias Wennberg, a trader at Coeli AB in Stockholm, whose Power Surge fund lost 8.6 percent. The fund targets annual returns of 20 percent. “That created a range- bound market, without strong trends, either up or down. Prices had no big reasons to move for longer periods.”

Rainfall and snow melt are the most important price drivers in the Nordic market and hydropower accounts for 99 percent of Norway’s electricity use. The water from rain and snow is kept in dams and fed through turbines to generate power.

Water, Snow

The surplus, measured as the excess of water and snow available for power generation compared with mean levels collected in past years, averaged 12 terawatt-hours in 2012, according to data from Markedskraft ASA. That’s the most since 2007.

“Last year was full of noise, with jittery overnight price jumps and a general lack of longer price trends,” Mattias Hellberg, manager of Shepherd Energy AB’s Shepherd Energy Fund, which dropped for a third year, losing 4.8 percent, said by phone from Stockholm. “The market will be more back to basics and weather-driven this year with longer price trends,” after the water surplus turned into a deficit in December, he said.

The glut was erased on Dec. 20 and the shortfall, measured as the deficit in available water compared with prior years, has since expanded to as much as minus 12 terawatt-hours yesterday, Markedskraft data on Bloomberg show. The deficit is poised to rise to 15 terawatt-hours by Feb. 25, according to Markedskraft. That’s almost half of Denmark’s annual power demand.

Losing Streak

The Nordic next-year contract fell to 35.50 euros on Feb. 1, the lowest level since December 2009. It closed at 37.48 euros today.

“Decreasing coal and carbon prices combined with weak German power prices are expected to limit the potential for further price increases” in the Nordic market, Norsk Hydro ASA said today in its 2012 earnings statement.

In 2012, the longest streak of losses for the next-year contract on Nasdaq OMX’s energy exchange in Oslo was five weeks, compared with a six-week slide in 2011. The longest gain was five weeks in 2012, compared with a six-week period in 2011 and an eight-week advance in 2010.

Sector Asset Management AS’s EuroPower fund, which advanced 12 percent last year, was the only fund in the survey that gained. That was its second best return since inception in 2006.

Closing Down

“We earned most of the money from short-term trading last year, keeping positions for less than one month,” Thor Lien, managing director at Sector Epsilon AS, said by phone from Oslo. “We rely on a mixed trading strategy, both long and short-term, since using only either one is too one-sided.”

The Nordic Power Index Fund, started by NEF Asset Management AS in Oslo on Dec. 18, lost 0.17 percent during the last two weeks of the year, Tom Holmen, chief executive officer, said by e-mail. The fund continues with the same capital and strategy as the Nordic Power Fund, which shut in November after nine years. It lost 2.1 percent from the start of the year, Holmen said.

Adapto Advisors AB in Stockholm ceased trading in its two- year-old Adapto Energy Fund in June after redemptions and a loss of 3.3 percent in the first six months of 2012. Fredrik Adolfson, its portfolio manager, joined Statkraft SF, Norway’s biggest utility, as senior power trader in November.

NK Funds AS in Bergen, Norway, also closed its Nordic Power fund in August after incurring losses because of fluctuating prices, Bjoern Ellertsen, chief executive officer, said that month, declining to provide further details.

Fluctuating Prices

The Nordic region had a surplus of water for power generation from July 2011 through December last year, Markedskraft data show.

“This damped price movements, and forced one to trade very often and be quite active, which contrasts with the longer-term modus operandi of most power funds,” Coeli’s Wennberg said. “2012 was a short-term market, with prices fluctuating back and forth every two to three weeks, which was ill-suited to our longer-term strategy of following trends for several months.”

At the end of November, the surplus was 9 terawatt-hours. Colder-than-average temperatures in December boosted power demand and utilities in Norway, Sweden, Finland and Denmark produced 8 percent more electricity that month than a year earlier, according to data from the Nord Pool Spot AS exchange in Oslo.

“This is an excellent illustration of just how rapidly the Nordic power system can shift from one extreme to another,” Mats Forsell, commodity trader at SEB AB, said in a Jan. 22 report.

Trading Opportunities

Money managers may see more trading opportunities this year because of the hydro deficit as well as proposed emergency measures by the European Union to help carbon prices rebound from a record, according to Jon Ove Heen, a senior trader in charge of Markedskraft’s managed accounts. That may impact electricity prices.

“Politics and weather are very unpredictable, and as traders, we don’t have any control and must simply try to manage the best we can,” he said.

To contact the reporter on this story: Torsten Fagerholm in Helsinki at tfagerholm@bloomberg.net

To contact the editor responsible for this story: Lars Paulsson at lpaulsson@bloomberg.net


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