Nat Gas Flash Crashing
Nothing like a little flash crash in nattie on no news to spice up the day of 10% staffed trading desks. Margin calls anyone?
Not surprisingly, Cramer was out on Friday pitching nat gas.
And here is the WSJ speculating that another fund collapse hit the market last week:
The rally in natural-gas prices has caught many hedge funds flatfooted,
sparking a string of unexpected losses for top-name players.
Morgan Stanley Smith Barney clients invested in a $640 million group of
funds that have emerged as some of the biggest losers in the turmoil.
Hedge funds known as "trend followers"—which chase market movements,
rather than making fundamental investment decisions —also appear to
have been hurt on bad trades.
Earlier this year, traders and portfolio managers across the Street
rushed into natural-gas trades, with the "consensus opinion" that
prices would continue to languish.
For most of that time, the bet proved a surefire winner—gas prices
tumbled 22% in the first five months of 2010—and investors piled in.
The trade was so popular that by May 4, the overall sum of speculators'
bets flipped from wagering on a price increase to the opposite, or a
"net short" position, according to the Commodity Futures Trading
Traders believed that an increase in production and mild consumption
would continue to weigh on prices. Instead, prices shot up 15% in June
amid forecasts for the hottest U.S. summer in 30 years, which would
increase demand by power plants that use natural gas to generate
electricity. There also were predictions for a flurry of hurricanes,
which could cause halts in production.
Trading natural gas has long been considered a game for the strong
willed. The commodity fluctuates wildly—for example, last August it
lost 40% before jumping 93% in September.
One specific trading favorite, betting on the difference in pricing
between a summer and winter contract, is known in the market as the
"widow maker" for its perilousness. That particular bet brought down
Amaranth Advisors in 2006, one of the biggest hedge-fund collapses in
Speculation about another fund collapse hit the market this week, with
traders guessing that funds were forced to close out their positions.
"You definitely had a large number of institutional shorts in this
market. This rise has caught some of these participants by surprise,"
said Teri Viswanath, director of commodities research at Credit Suisse.
Five funds housed within Morgan Stanley Smith Barney, investment pools
catering to clients of Citigroup Inc. and Morgan Stanley, have lost
$120 million or more this year on energy bets, based on assets detailed
in public filings.
The Bristol Energy Fund, which as of the end of March held some $500
million in assets, and several smaller funds managed by Houston-based
hedge-fund manager SandRidge Capital suffered as natural-gas trades
went against them. Big SandRidge funds lost some 15% in the first half
of this month, bringing the firm's 2010 decline to about 19%, Reuters
"The manager has experienced a difficult performance this year, and in
particular this month, but since we have been working with them, they
have generated a positive return for clients," a Morgan Stanley Smith
Barney spokeswoman said. She wouldn't comment specifically on the
funds' performance. SandRidge couldn't be reached for comment.
Superfund USA, which runs several managed-futures portfolios with $1.25
billion in assets, has been shorting gas this year. The fund lost money
on its natural-gas position, which accounts for 1% of its total assets,
in April and May, before being forced to close out the position in late
May by its technical signal, said Paul Wigdor, chief investment officer.
On June 4, Credit Suisse recommend investors short natural-gas for
October delivery, saying the rally had gone too far. The contract was
then trading at $4.94 per million British thermal units, and has gained
4.3% since, settling Friday at $5.153.
"In hindsight, we were probably a little bit early," said Ms. Viswanath
of Credit Suisse. "Our failure was in underestimating the strength of
this particular rally." The Swiss bank still reckons that there will be
a correction in gas prices before the end of October. Some funds have
profited by chasing the upward momentum.
Tim Pickering, president of Auspice Capital Advisors, said the firm is
"doing great on natural gas." Auspice runs a natural-gas
exchange-traded fund and a diversified commodity fund. The $232-million
Claymore Natural Gas Commodity ETF was up 7.4% since the end of May.
London-based BlueCrest Capital Management LLP was up about 2% this
month as of mid-June, and more than 3% for the year, in its $10 billion
BlueTrend Fund, helped in part by natural-gas trading gains, a person
close to the matter said. That followed a loss of about 8% in the fund