August 13, 2007
Funds Hiring Weathermen To Provide Trading Insight
While mutual fund companies and investment banks have had meteorologists on their trading desks for almost 30 years, the practice apparently is increasing-affecting portfolio managers' trading decisions not only of commodities, power, utilities, agriculture and energy securities, but also consumer goods, transportation, construction, infrastructure, shipping and leisure. In addition, in the past 10 years, the insight of meteorologists on the trading floor has led to the development of weather risk management tools-futures, derivatives and insurance.
Bringing a meteorologist on board certainly makes sense, especially in light of global warming and increasingly unpredictable weather, and is one of the more innovative developments we've heard about in the investment management industry in a long time.
Weather futures, for instance, are reportedly a $29 billion business, attracting not only utilities looking to buffer swings in demand but, increasingly, hedge funds looking for new ways to deliver strong performance. The Chicago Mercantile Exchange indicates that weather contract volume has doubled in the past four years to about 730,000 trades in the 12 months ended in March, while the number of market participants has increased 20%. According to the Weather Risk Management Association, a trade group, weather contracts have a face value of $19 billion.
Furthermore, in 2003, according to PricewaterhouseCoopers, the value of all weather transactions amounted to $4.7 billion. By 2006, this number jumped nearly tenfold to $45.2 billion. This explosive growth has come overwhelmingly from weather risk trading, which now clearly has reached a level of critical mass as a class of commercial activity.
"The weather risk market no longer is a novelty to industries around the world," said Brian O'Hearne, past president of the Weather Risk Management Association and managing director of Swiss Re's environmental and commodity markets.
As an example, when the meteorologist at hedge fund PCE Investors predicted heavy rains in Britain in July, it shorted Magners cider, knowing turnout at the pubs would be sparse, and the stock fell 40%.
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