The growing presence of hedge funds in the gas and oil markets has been blamed for increasing volatility and driving up prices, but little is known about these private investment groups and their market influence. Two consulting firms, UtiliPoint International Inc. and Global Change Associates (GCA), have announced plans to tackle this mystery in a new study, “Hedge Funds Enter the Energy Trading Space.”

“Given that a year ago I hadn’t even heard the word hedge fund with respect to energy but today we can actually list more than 100 hedge funds that seem to be playing in the energy markets in one way or another, I would say that it’s a rapidly growing and very exciting development,” said Gary M. Vasey of UtiliPoint.

Vasey said it is very likely that the growing presence of these speculators has increased volatility and prices in the crude oil markets, but he also said that is only a sign of things to come.

“Recently crude oil prices started to fall because of assurance of increased production from OPEC and things like that, but then prices went back up again. If you look at the underlying normal reasons as to why that might be, there don’t seem to be any normal reasons,” he noted.

Funds are unregulated and don’t tend to advertise who they are and what they’re doing. Vasey said he hopes to essentially unmask these new market players and investigate exactly what they are up to and what impact they are having on markets and on other companies in the energy industry.

UtiliPoint and Global Change plan to conduct an electronic survey of the hedge funds that they know about — and so far the list has grown to about 100. They also plan to conduct interviews with people who are associated with funds to gain some background information.

In addition, they plan to look at the publicly available data, such as the Commodity Futures Trading Commission’s Commitments of Traders reports, which list general information about the types of companies in the commodity futures markets.

“We know that there are existing hedge funds that have hired ex-Enron and ex-Dynegy trading people and we know there has been some activity in the crude oil markets,” said Vasey. “We know that there are new hedge funds being started on almost a daily basis by ex-energy traders and people with connections to the financial markets. The evidence is all there to suggest that this is a major trend.

“You also have to combine that with the evolution of the commodity markets in general,” he said. “Energy markets right now are dominated by physical trading but if you look at other commodity markets, one has got to ultimately expect that given the right circumstances that energy markets will evolve in a similar way. Financial trading ought to be several times the volume of physical trading.”

And hedge funds are likely the beginning of that evolution, he said. “What we are seeing right now is that the increased prices in some of the energy commodities as well as the implicit volatility within the prices is attracting additional interest in terms of hedge funds and investment banks.”

“The next wave of energy trading has now begun with hedge funds entering the energy market,” said Peter Fusaro, chairman of GCA. “Their importance can not be understated as both liquidity providers and price influencing factors.”

The hedge fund multi-client study prospectus is available at both UtiliPoint’s and GCA’s Web sites (www.utilipoint.com, www.global-change.com).

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