From the Wall Street Journal via Yahoo Finance, July 7:
The Next Big Power Play on Wall Street
There is a new force on Wall Street: power traders.
Hedge funds are piling into power, drawn by volatile electricity and natural-gas prices that could remain turbulent. They are offering incentives like big sign-on bonuses, large profit-share deals and company cars with drivers to lure traders from utilities, banks and rival investment shops.
“There is a spotlight that is now shining on us today, more than any time before,” said Juan Penelas, co-founder of e360 Power, a Texas-based hedge-fund firm with a focus on electricity trading. Assets under management have roughly doubled since the start of 2022, to about $470 million.
Electricity is the busiest desk at HC Group, a London-based headhunting firm that focuses on commodities. Over the past year, the firm has helped financial firms with more hires in power than in oil, an executive at the company said.
Behind the boom are two trends: the rise of energy-intensive artificial intelligence and of electrification due to the energy transition. The International Energy Agency projects that AI’s energy usage will rise 10-fold over the next two years.
Global trading volumes for electricity futures jumped by 35% between 2019 and 2023, data from a McKinsey study showed. Some regions have seen much bigger increases, with Nordic volumes surging 14-fold and those in the U.K. tripling.
Some huge hedge funds have taken note, according to people familiar with the matter, including some of the world’s largest so-called multimanager firms, which use specialized teams to spread bets across a range of markets.
Citadel, which manages $63 billion, was an early mover and recently increased the size of its team. Millennium Management and Balyasny Asset Management have also built up their desks, snapping up traders and analysts from a range of players in the market, including utilities.
Bobby Jain, formerly co-chief investment officer at Millennium, launched a hedge-fund firm this month after securing $5.3 billion in commitments. Jain Global has hired more than 10 portfolio managers for commodities, which will be a key asset class. Within commodities, power and gas will be the biggest initial focus, people familiar with the matter say.
Power is one of the most volatile commodities. To get a sense of just how much it fluctuates, consider Brent, the global benchmark for crude oil. It has traded between roughly $73 and $95 a barrel over the past 12 months. If it traded like power, though, the price could have swung between negative levels and $850 a barrel, according to McKinsey.
The volatility and complexity of power markets present trading opportunities and risks. Over the years, companies as varied as JPMorgan and Électricité de France, or EDF, have run into difficulty trading power, while Enron blew up in part because of it. Wrong-way bets can quickly rack up huge losses, and regulators are eager to avert spikes in energy bills for households and businesses....
....MUCH MORE
