Opalesque Industry Update – Diapason Commodities Management, a $7bn independent commodity investment manager headquartered in Lausanne, Switzerland, launched the Diapason Relative Value Petroleum Industry Fund (“DRVPIF”). |
DRVPIF is an energy markets arbitrage fund and is the first fund based on the micro-economics of the refining industry. The Fund trades spreads between commodity future contracts, and will provide absolute return and de-correlation with traditional energy related strategies, with proforma performance showing strong double-digit returns.
The investment team uses Diapason proprietary modeling of the refining industry to determine the equilibrium relationship between crudes and refined product prices. Any divergence from this relationship will lead to an arbitrage opportunity. The Fund will be ‘Barrel-neutral’, and so is not exposed directly to directional oil price movements, but will exploit refining margins and quality premiums, by following the daily movements of the three major refining hubs - US Gulf Coast (USGC), Singapore (SING) and North Western Europe (NWE). Arbitrage opportunities lie between and within each of these hubs.
Edouard Mouton, Head of Quantitative Research at Diapason commented, “We believe industrial players and specifically refiners drive the price differential between substitute or derivative oil products. By taking long and short positions on specific crudes and products our consummate strategy allows us to profit from the rational behaviors of these industrial players as they react to changing market conditions”.
He added, “The excess capacity in the refining sector has placed even more emphasis on industrial players maximizing cash margin, and looking in deep details at each plant’s technology and each hub’s specificities the Fund is able to anticipate market changes linked to daily adjustments made at industrial plants. Taking long and short positions on specific crudes and products, the Fund seeks to mimic one of these plants and benefits from the anticipated adjustments”, he added.
The portfolio will be managed under strict risk constraints, with the allocation between the different spread-strategy pairs optimized through a Sharpe ratio maximization process until the pre-defined risk budget target is hit, and a stop-loss set for each pair, using a high-watermark feature.