Price volatility and an abundance of energy trading talent — available since the collapse of Enron Corp., et al, — have revitalized the merchant energy sector and created a booming opportunity for speculative hedge fund trading, several financial consultants said Thursday.

Kiodex Inc., a technology company that provides a web-services platform for corporate risk management, sponsored a “webinar” on Thursday that brought together a panel of experts to talk about the growth in energy hedge funds.

Gary M. Vasey, vice president of the trading and risk management unit of UtiliPoint International Inc., said the emergence of investment banks and hedge funds “as energy commodities traders” has led to a rebirth in energy trading. “We are now seeing a return to speculative trading in the energy industry, and it’s here to stay.” His company has identified at least 200 funds “that are playing in the physical markets, and they have significant funds.”

Most of the energy hedge fund capital is coming from “private accredited investors,” with the bulk of the new trading from pension funds, Vasey said. “What’s happening right now is that pension funds are looking for ways to increase their risks of return, and mutual funds and equity markets are not producing those kinds of returns.”

The market has grown so quickly, in fact, that Vasey admitted that it is difficult to determine how many new energy hedge funds are entering the market. However, “we are seeing indications that new hedge funds are being created for energy trading on an ongoing basis. We are certainly seeing existing macro funds creating energy funds too.” Macro funds try to profit from speculating on broad global trends and geopolitical disruptions.

“In the last month, we’ve been adding about five new funds on a daily basis, and many of these new funds we’re finding out about from personal contacts, and many of them are new entrants into the energy commodities marketplace,” said Vasey. Most of the new funds originate in North America, but he said there are some in Europe and the Far East as well.

Charles Relf, a Kiodex financial vice president, said the new participants need to provide proactive risk management strategies if they want to succeed. “It’s not enough to have a talented energy trading team,” he said. “The two main ways to achieve confidence in the market are to provide risk controls and operational transparency.” Participants also should “insist on the independence of evaluation and require independent market data.”

Raj Mahajan, president of Kiodex, said the “liquidity vacuum in energy trading…needs to be filled by entities with strong credit. The investment banks and hedge funds, with pristine balance sheets, are seizing this opportunity. This is reflected in the growing demand for data and trading & risk management tools generally across the banking, brokerage, and funds segment of the industry.”

In a report issued earlier this month, the International Monetary Fund (IMF) said it plans to increase its monitoring of energy trading and related market developments as more banks and hedge funds enter the energy markets (see NGI, Sept. 20). Its bi-annual “Global Financial Stability Report” said scrutiny is needed because of financial institutions’ greater exposure to energy risks from volatile prices for crude oil and petroleum.

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