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Energy Hedge Funds Move into Europe (February 15, 2005)
Location: New York
Author: Peter C. Fusaro, Global Change Associates Inc.
Date: Tuesday, February 15, 2005

Because of anemic returns averaging around 8% in 2004, more and more hedge fund investors have started turning to the energy sector in their quest for greater profits. Until now, these specialist hedge funds have been largely a North American phenomenon, with most to be found in the New York metropolitan area.

But according to research compiled by Peter Fusaro, chairman of Global Change Associates Inc., investors' growing interest in energy hedge funds has led to the creation of several new funds in Europe. Indeed, of the more than 300 energy hedge funds which Fusaro thinks will be launched this year, a large number of them will be in Europe.

Small in Size

Specifically, Fusaro says new funds are being formed and launched in Great Britain , Switzerland and Spain . Many of these new specialist energy funds are small both in terms of assets under management ($1 to $25million) and in terms of overheads (2-4 staff). Most are operating below the radar screen, particularly with regard to "family money."

As for that other likely European base for energy hedge funds - Germany -- Fusaro says that country is still really "the duopoly of Deutsche Bank," and thus the Germans likely will trade through Switzerland for the time being.

Fulfilling Investors Goals?

Whether energy hedge funds will actually fulfill investors' profit dreams is an open question. As reported in the February 1 issue of Fusaro Focus, last year some energy hedge funds were up 40% to 50%, and one was rumored to have been up as much as 100%.

Fusaro says the idea that energy will provide substantial returns from a number of fund strategies and approaches has been heralded by most cognoscenti' energy analysts because energy is in the middle of long-term bull market that could stretch past 2010 due to under investment in the energy sectors for many decades.

However, while hedge fund investors generally now view energy as an "alternative asset class" with the potential for significant returns, Fusaro says that in about two years the market could be "picked clean" because too many funds will be engaged in trading and investment.

Diversified Trading

For now, however, the energy hedge fund movement in Europe is still gaining steam. As in the U.S. , the action in Europe extends across the entire energy complex, encompassing not only energy equities but also oil, gas, power and coal companies, plus also emissions trading.

Indeed, Fusaro says European funds are investing in energy commodities such as exchange traded futures contracts for crude oil, gasoline, heating oil (gasoil in Europe), and natural gas -- plus Over-the-Counter contracts in oil, gas, power, coal, weather, carbon, renewable energy credits (called ROCs in the UK), NOX and SOX emissions, oil and gas reserves, distressed generation assets, and equity/commodity plays.

One example of a specialist European fund is Eiger Oil, a very public Swiss oil hedge fund that launched in October and is already reporting returns in the range of 30% for the last quarter of 2004. The Eiger oil fund invests in oil-related equities, daily price trading of oil derivatives and spread trading. It is focused on investing in the oil industry believing it to be attractive due to a variety of factors including current capacity shortages.

Investment Banks Should Benefit

In recent discussions with his European sources, Fusaro says he saw both a tremendous interest in the energy sector and a total lack of understanding of energy commodity markets. Therefore, Fusaro believes that while some of this investment fervor will be captured by hedge funds, investment banks such as Morgan Stanley, Barclays Capital and Goldman Sachs also should benefit handsomely.

To be sure, the energy hedge fund action isn't limited to Europe. Momentum also is starting to build in Asia, according to Fusaro, specifically in Japan , Singapore and China . "Private investors want returns," he says. "Energy is hot with high prices and higher volatility than ever before."

Please send any comments to Peter Fusaro at or visit for further energy market information.
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