Hedge funds looking to allocate more cash to oil markets are a growing customer base for energy trading firms offering risk management in Asia such as Mitsui & Co, a company executive said on Monday.

Akira Kamosaki, deputy managing director of Mitsui & Co. Energy Risk Management (MERM), said hedge funds use them as a means to grow their portfolios, unlike other firms using risk management such as industrial oil consumers and producers.

The volume of fund money has increased substantially and is growing rapidly. While fund money has been in oil for quite a few years now, it started showing rapid growth in the last few years, he said in an interview with Reuters in Singapore.

MERM opened its office in Singapore this month, its first in Asia, with four traders and two marketing staff, after operating out of London for the past five years, as it sees growing regional business. Oil prices have rallied to near record highs this month, as speculators buy into worries over fuel supplies.

The funds basically invest a sum of money and seek to grow their investments and have higher risk appetite, unlike traditional users, which hedge their exposures to the markets and do not like volatility.

The higher risk appetite of the funds, together with the lower appetite of traditional customers, has created a balance for the company although there are some difficulties in matching volumes, timings and the type of oil product, Kamosaki said.

The funds mainly invest in energy-related derivatives such as options and swaps or tailor-made products that combine the two types of financial instruments, he added.

MERM, which trades crude and all oil products, targets growing its customer base by 50 percent in the next year, but Kamosaki declined to elaborate on how large its current base is.

Banks offering risk management services have boosted trading teams in Asia in recent years, as they try to wrestle business from leaders Morgan Stanley and Goldman Sachs.

However, unlike the two U.S. investment banks, Kamosaki said MERM will not move into the physical oil market in the foreseeable future. Sister company and physical trader Mitsui Oil Asia (MOA) closed in Singapore after a scandal in naphtha-trading resulted in $81 million of losses last year.

I don't think we will go into it. The physical business has totally different costs and risks, he said.

Another challenge, he said, is the market's current volatile state, particularly for crude and fuel oil, which has broken record highs in Singapore more than 10 times in the past month.

On one hand, it has created more opportunities for the firm as more end-users and producers seek protection for their oil exposure. On the other, it has become more difficult for MERM to manage its own day-to-day exposure.

Investment Energy