For the dozen or so niche hedge funds that make their money in the natural gas market, January's wild trading should have come as a welcome relief.
After three years of calmer, range-bound activity, gas prices fell into a dramatic tailspin and volatility spiked, providing the kind of directional movement and intra-day swings amid which such funds typically thrive.
Memories of the mid-2000s, when fortunes were made and lost in days, returned.
But with only a few exceptions, the month was a wash for these billion-dollar funds, with managers in Houston and Connecticut failing to capitalize on the 16 percent slump in prices to a 10-year low amid tepid winter weather and an unyielding glut of shale gas.
According to a Reuters analysis of performance data provided by industry sources, the gap is widening between a handful of big winners and those who are trying to regain momentum after 2011, the worst year in over a decade for many commodity managers.
When hedge funds see a lot of volatility in natural gas, they hop in to get a piece of the action, said Kiplin Perkins, market data analyst at Parity Energy, an online platform for energy options trading.
Natural gas has historically been more volatile than many energy commodities as it a smaller, U.S.-confined market compared to a global play like crude oil. Unlike oil or gold, where big macro-funds are active players, natural gas has tended to attract only a handful of specialized fund managers, with a total of about $12 billion or of capital, according to data on the capital holdings of the funds involved.
Last year, gas was also one of the worst performing commodities, with prices falling more than a third while a few top funds in the business posted some of the largest gains across the hedge fund universe.
That decline accelerated in January, when traders also saw a return to the kind of gyrations that were common in the years prior to 2008, when the financial crisis and rise of shale gas production cast a pall on the market.
Prices rose or fell by more than 8 percent on five days in January, more times than in all of 2011. Implied volatility -- a measure of options pricing -- doubled to more than 60 percent, the highest in three years.
The roller-coaster ride has greased the profit wheels of a few acclaimed hedge fund managers in gas, including David Coolidge of Velite Capital and Todd Esse of Sasco Energy.
Houston-based Velite stood out last year for its persistently bearish bet against gas, notching a 51 percent return. The streak continued in January, with the $1.4 billion fund gaining 14 percent, one industry source said. It has averaged a 12 percent gain for each of the past three months.
Sasco, founded by former senior Sempra Energy trader Esse in 2008, gained more than 5 percent on average over the last three months, including a nearly 8 percent rise in January, according to an investor in the Westport, Connecticut-based fund, which manages nearly $500 million.
While little is known of the exact trades put on by these funds as the swings accelerated in January, analysts believe a creative mix of futures and options were deployed to profit from prices that sunk to 2002 lows before rebounding 14 percent at one point.
And while the majority were naturally short on prices given the oversupplied physical gas market, a few admitted going long when technical charts indicated an oversold market.
Returns for the sector's most famous member -- Enron legend John Arnold's Centaurus fund -- were not immediately available. The $4 billion fund returned about 9 percent last year.
Representatives at the funds named this story, including Velite and Sasco, declined to comment on their performance or strategy.
A DOWN MONTH
Other gas-focused funds had modest -- even negative -- returns for November through January, data gathered by Reuters showed, showing that most struggled to turn the market's ups and downs to their advantage.
AAA Capital, a $1.4 billion fundamentally oriented fund group founded 15 years ago by Houston veteran Anthony Annunziato, ended the month almost unchanged after a 4 percent gain in December, the source said.
Whiteside Energy, also located in Houston and managed by former Citadel energy trader Carey Metz, fell more than 4 percent over the three months, the sources said. Its January loss was more than 6 percent.
The average energy hedge fund rose 2.4 percent in January, although monthly gain since November averaged only about 0.4 percent, according to New York-based industry database investment Alliance.
Analysts said one of the more successful trades in gas since November could have been the use of straddles, considered the most aggressive play on volatility.
The strategy involves buying put and call options on gas at the same strike price. If prices move sharply in either direction, one side of the trade reaps gains and the other loses. The maximum loss is the premium paid for the options, while the potential for profit is unlimited.
Some funds used more plain strategies: going short when they suspected prices were too high and long when they believed the selling was overdone.
We were short outright, said a trader at one of the better performing gas funds, speaking on condition of anonymity. Sometimes we were structurally short, meaning we were short on the price curves we thought were overvalued and long on those we thought were undervalued.
I think the rest probably traded more options than we did. They may have had options strategies pinned on the market being somewhat quiet and they may have sold off on volatility and lost money there.
GAS MARKET GOES FROM CALM TO VIOLENT
Natural gas spent much of last year trading in a fairly stable range of between $4 and $4.50 per mmBtu. Prices were essentially capped by record supplies of gas tapped from a relatively new and abundant source: shale.
With few traders anticipating a price swing amid the glut, implied volatility held relatively steady at between 35 and 40 percent through the third quarter. In January, it reached about 65 percent -- its highest in nearly three years.
When you see volatility over 50 percent, it indicates there is not a lot of certainty about prices, said Frank Hayden, principal at Risk & Decision LLC, a risk management consulting firm in Houston.
While futures activity in gas was tame during most of last year, the market for options - which basically provide investors an insurance against sudden, adverse moves -- was even weaker.
Options are protection. When prices are stable, people don't want to pay for protection, said a U.S. East Coast trader in gas options.
The first signs of a price breakdown came in late summer and early autumn, when oversupply drove gas firmly below the $4 support.
When winter didn't materialize, the fundamentals did not support a $4 price. Then the question became: 'How low can gas go?' the East Coast trader said. Suddenly, people were buying puts for protection.
Prices continued to erode into winter, falling below $2.50 in January to a 10-year low of $2.23, as unseasonably warm weather slowed demand for heating and left a huge surplus in gas supplies.
Gas futures on the New York Mercantile Exchange slid 24 percent during eight sessions in January, their steepest eight-day drop in six years. A week later, the market bounced 14 percent, after several gas producers said they would trim production in response to low prices.
There were surely some traders that got crushed at the $2.50 level, said Parity Energy's Perkins. When they tried to cover their shorts, the got squeezed and volatility got pushed even higher.