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Opalesque Exclusive: Highlight on energy (3) - Rampart bets on UK power

Posted on 04 February 2010

Benedicte Gravrand, Opalesque London: Rampart has one of the few energy-focused funds that exist across the hedge fund industry. Energy, whether traditional or new, has provoked heated debates since the awareness of global warming and peak oil came to the fore. These funds try to take advantage of price discrepancies that these markets provide or of new opportunities arising in the nascent markets of renewables.

“The intense media pressure following the discussions in Copenhagen will continue to highlight the environmental sector,” said earlier this year Ian Simm, CEO of Impax Asset Management, a specialist environmental investment manager in London.

He believes that, as interest in clean energy, energy efficiency and the drivers behind environmental markets will continue to strengthen, 2010’s trends will include a tentative return to global growth with increasingly positive macroeconomic data and consumer spending improvements; better economics of recycling in light of rising commodity prices; and new markets arising from global warming policies.

The HFRI Energy/Basic Materials Index, which returned 4.06% in December and 41.58% in 2009, was one of HFR’s top performing indices that year. The same index was down 38.3% in 2008 (the worst performer that year) and up 16.4% in 2007 (the top performer that year).

Our fund today, the Rampart Capital European Energy Fund, is soon to be launched by two managers who believe that European energy, and in particular natural gas, coal and emissions are a niche commodity asset class. Energy markets have provided some spectacular returns, and whilst there are many hedge funds capturing these return in the US, very few are present in Europe, they say. The market is still in its infancy, with associated glaring inefficiencies at times. In conjunction with high volatility, this opportunity provides a great platform to generate superior absolute returns.

Rampart Capital LLP is an investment manager based in London specializing in the European energy markets, generally trading in UK natural gas and power, German power, coal, emissions (CO2) and oil - so a non-correlated asset class. The main partners, Marcello Romano (CIO) and Barnaby Reason (COO) previously set up and managed Foundation Energy Ltd, the first independent trader of similar products in Europe.

At Rampart, they started trading via a managed account on 1st September 09, so they have been operational since then. The Rampart Capital European Energy Fund, a Cayman-based entity, should be launched in the two next months. “We have an agreement with a few investors. We are currently operating a managed account with another one which opened on 1st December (the same strategy, for a new customer),” said Reason.

The fund’s strategy uses cross-commodity, location and time-spreads to provide high absolute returns on a positively skewed risk vs. returns basis. Rampart also follows a fundamental analytical approach to trading.

The managers look at the whole complex as one strategy. They trade in a lot of different cross-commodities, a lot of time-spreads; 75% of the portfolio is relative value; and any directional trade is in a short-term opportunistic phase rather than a strategic position.

“UK gas has probably the largest allocation of risk at the moment,” said Reason. It is a market that the partners know well, and that has more liquidity than any other energy market in Europe. They see some value in some of the spreads - more so than in other products right now. That can change month to month or week to week.

Rampart is not involved in the physical market at all. “We are only spreading futures so you can’t split out,” Reason explained. “In the actual commodity (market), the commodity is what is delivered. Whether it’s green energy or traditional thermally-generating power, it makes no difference. Gas is gas, and power is power. There is no differentiator in the wholesale market between the two.”

“We do trade emissions, carbon. When we trade power we often strip out our emissions risk.”

The managed account returned +3.97% in Dec-09 and +10.23% since inception. December was a month in which every trading strategy was positive, according to the managers, who also made gains on cross-commodity trades as they saw correlation between gas and oil break down. The oil contango continued to widen, also assisting their spread positions. Profit was also made on clean sparks as the emissions rally on the back of the Copenhagen Summit fizzled out and led to an emissions drop.

Very few of the European energy funds that are around trade UK products as most trade continental power or Nordic power, whereas Rampart trades European power and UK gas and UK power, continental gas, emissions, oil and coal.

“You must remember,” said Reason, “most of the risk and hedge fund capital in this space is currently being managed by multi-strats that don’t break (down) European power: you have Brevan Howard, Elliott, Tudor Capital, Centaurus and others. None of those companies break out a European performance discreetly. They’re just lumped together with all the other products they manage.”

UK power: trying to find more sources
In March 2007 the UK Government published a draft Climate Change Bill aimed at requiring a mandatory 60% cut in the UK’s CO2 emissions by 2050 (compared to 1990 levels). During that year, the total energy consumed in the UK was the equivalent to 164.6 million tonnes of oil (an increase of 11.74% compared to 1990).

Due to the decline in North Sea production, the UK is expected to become a major importer of oil and gas by 2015 (it became a net importer in 2004.)

It was reported earlier this week that the UK government had announced a tax break for gas exploration firms to encourage more drilling in the North and more investments, as it may contain “about a fifth of the UK’s remaining oil and gas reserves.” At the same time, the Energy minister issued a series of licences for exploration under UK waters.

Part one (Tiburon: Wind and solar won’t save the world, hence the renaissance of nuclear) can be found here, and Part Two (ARP: Now we can all hedge power exposure intelligently) here.

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