Issuu on Google+

!"#$%&'#()$*!++$#*,'%-$#+ !"#$%&'(")*+$!"#$,-./)0-1*+

."(/'*,0%(+(1 222222222222222222222222222222222222222222222222222222222222222


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


!!!!!!!!!"#$%&!'(!)*+,&+,!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! !./0!1%*$#%!2#345+6!7+8&9!:!./0!13&&+;*<-&!7+8&9!:!./0!/%<&!0&#!7+8&9

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

!"#$#%"$&'(")*+ ,&")$-*',.$#/*'0"1*+'2"+*'-3'4*$-.*5'6*7/*

895':;

!"#$#%"$&'(")*+ <*-'4"-.',3#1"%-"3#'3#',&")$-*',.$#/*

=$>':;

!"#$#%"$&'(")*+ ?@#'?."#*+'8/$"#'3#'4*$-.*5'A*5"1$-"1*+

B@#':;

!"#$#%"$&'(")*+ C<?'-3'D$@#%.',&")$-*',.$#/*'A*5"1$-"1*+

B$#':E

!"#$#%"$&'(")*+ 63-'F*G'H9935-@#"-"*+

!*I':E

!"#$#%"$&'(")*+ 4*$-.*5'<&3G+'8/$"#+-'J5*1$"&"#/'4"#7

!*I':E

!"#$#%"$&'(")*+ C<?'-3'?-$5-'!5*"/.-'!@-@5*+'K#7*L

895':E

4$&&'?-5**-'B3@5#$& ?*%@5"-"*+'!"5)+'($5/*-',&")$-*',.$#/*'=$5M*F"MM*"'?."#I@# C<?'A*1*&39+'"#1*+-)*#-'<*#%.)$5M'3#',$5I3#'$#7'4*$-.*5

=$5':E B$#':E

2*@-*5+ C<?'?@%%*++N@&&>'63+-+'D$5/*+-'4*$-.*5'A*5"1$-"1*+'8@%-"3#

B$#':E

2*@-*5+ C<?'?-$5-+'=$5"#*'!5*"/.-'K#7*L'-3'($9',."#$'<33)

895':E

2*@-*5+ ,HO'K#7*L*+'8--5$%-"#/'K#-*5*+-'

=$>':E

2"+M'=$/$P"#* ="L*7'!35*%$+-

?*9':E

2"+M'=$/$P"#* (*)93'K#%*5-3

?*9':E

2"+M'=$/$P"#* K#7*L*+'Q)*5/*+

B$#':E

2"+M'=$/$P"#* (.*'?-$-*'3N'!5*"/.-

B@&':E

2"+M'=$/$P"#* Q1*5>',&3@7'R

?*9':E

<5*$M"#/'S"*G+ F3'?@I95")*'"#'4*$-.*5

?*9':;

F*G+'!35'<$#M+ 0*--"#/'$'05"9'3#',&")$-*'2"+M

?*9':;

F*G+'!35'<$#M+ (@5#"#/'@9'-.*'6*$-

B$#':E

F*G+'!35'<$#M+ <&@*'?*$'(."#M"#/

895':E

D&3>7T+'D"+- F*G'J537@%-+'D33M'-3'J$+-'N35'K#+9"5$-"3#

=$>':E

D&3>7T+'D"+- <&@*'?*$'(."#M"#/

?*9':E

J&$--+ C<?'D$@#%.*+'05**#.3@+*'K#7*L'@+"#/'QC8U',Q2'95"%*+ !V'4**M C<?'D$@#%.*+'05**#.3@+*'K#7*L DT8/*W D*'!5*-'=$5"-")*'?@+%"-*'&TK#-*5*-',53"++$#-'7*'&$'!"#$#%*

B$#':E B$#':E =$>':E

!@#7'X'K#1*+-)*#- ,3)*'2$"#U',3)*'?."#*

?*9':;

Q#1"53#)*#-$&'!"#$#%* 8'<5*+M'"#'(.*',&3@7+

=$>':E

8&-*5#$-"1*+'=$/$P"#* 4*$-.*5'A*5"1$-"1*+

=$>':E

8+"$'8++*-'=$#$/*)*#- =$5M*-'2$"+*+'J53W&*'Y8&-*5#$-"1*Z'?-5@%-@5*7'J537@%-+

B@&':E

(.*',3#-5$5>'K#1*+-35 J&$>"#/'(.*'4*$-.*5

B@#':;

!$"59&$> Q#-"%"#/'F*G'D"[@"7"-> J$#35$)$ S*#7"-35"'\Q',3)95$-35"'A"'!@)3] !"#$#P$'=*5%$-" 05**#.3@+*U'#$+%*'&T"#7"%*'?@&&TQNN*--3'?*55$ D$'S$#/@$57"$ C<?',5*$'C#'K#7"%*',&")$-"%3'0&3I$&

B@#':E B@&':; 895':; 895':;

,$#$7$'=3#*>' 0&3I$&'4$5)"#/'8#7'^3@5'J35-N3&"3

?*9':;

=%D*$#',$#$7$ (.*'05**#.3@+*'K#7*L'4"&&'2"+*'8+'Q$5-.'4$5)+

B$#':E

?$&3#'=$/$P"#* (.*5*T+'03&7'"#'(.*)'0&$%"*5+

H%-':E

K#1*+-)*#-'F*G+ F*G'C<?'K#7*L'J5*7"%-+'4*$-.*5 !"#$#P'X'4"5-+%.$N- (5*"I.$@+ =*-$&'="#*5 6*5*',3)*'-.*'?9*%@$-35+U'F3-'8/$"#'_

895':; B$#':E 895':E


!"#$%&'(')"*+%,%-+./+01+2%3445% %


Weather derivatives

The weather derivatives market continues to gain end-user, hedge fund and investor interest. Roderick Bruce examines the forecast and finds a silver lining on the current Wall Street cloud

Every cloud... ( After a barren year in 2006/7, the weather derivatives market has come storming back. Notional value of over-the-counter (OTC) and exchange-based weather trades on the Chicago Mercantile Exchange (CME) rose 76% between April 2007 and March 2008 to reach $32 billion, while contracts traded rose by 35% to 985,000 over the same period, according to a survey by PricewaterhouseCoopers (PwC). The market had reached a high of $45 billion in 2005/2006, and its decline the subsequent year led many to question its longevity. “Since its inception, the weather markets have faced challenges, but they continue to be resilient,” says Felix Carabello, director of alternative investments at CME Group. Carabello says the 2006/2007 drop in trading volume came from a period of staff reorganisation within market participants. He noted that traders’ risk appetite was reduced as they settled into their new roles. “Because a number of traders were changing jobs, we saw a decrease in volumes,” he says. “The moves were caused by market evolution and organic growth. It was like a kid losing its milk teeth before it matures.” End-user hedging business – particularly within the energy sector – remains the pillar that the weather market is built on. “In addi-

“A barometer of the market’s health is that end-user hedging transactions have been growing at a steady pace since the inception of the market” Martin Malinow, Galileo Weather Risk Management & WRMA

26 energy risk

tion to the headline numbers in the PwC survey, which have grown quite a lot over the years, perhaps an even better barometer of the market’s health is that end-user hedging transactions have been growing at a steady pace since the inception of the market,” says Martin Malinow, CEO of Galileo Weather Risk Management and president of the Weather Risk Management Association (WRMA). The weather markets look ripe for further growth. End-users are coming from a variety of new sectors, with increasingly advanced structured deals making risk transfer more effective, and innovative origination companies such as Storm Exchange and WeatherBill are offering improved access to derivatives for small businesses. Most significantly, as the winds of change sweep away investment banks and insurance companies on Wall Street, hedge funds and reinsurers are turning to the market in increasing numbers, as are investors seeking uncorrelated assets to diversify portfolios.

Energetic growth Market participants say that around 90–95% of global weather derivatives volumes come from the US, with Europe supplying the bulk of the remainder, with some trades occurring elsewhere, particularly Japan, Australia and India. The US energy sector, which pioneered the weather derivatives market in 1998 with a deal between Koch Industries and Enron, remains the biggest end-user, according to brokers. A CME Group / Storm Exchange survey carried out in April, which polled 205 risk and finance mangers across the US, found that 74% of respondents in the energy sector had attempted to quantify the impact of weather on their business, and 35% had actually employed

energyrisk.com


October 2008

The weather derivatives market has come storming back after a barren year in 2006/7

©iStockphoto.com/Tobias Helbig

weather hedges to manage that risk. That compares to 29% of retailers – none of whom had employed derivatives. “Energy companies are still the number one participant,” says Bill Windle, who began trading weather derivatives at Enron in 1999 and is now managing director at RenRe Investment Managers, a weather risk management company. “More and more unregulated energy providers are seeking our services because they do not benefit from regulatory mechanisms that limit their exposures – they’re in a truly free market, so volumetric and price exposure is significant.” More energy companies – producers, marketers and consumers – are getting involved in the market as product offerings advance. Significant new volumes are coming from cross-commodity deals that allow hedgers to offset both volumetric risk with traditional derivatives and price risk with more complex structures. For example, a deregulated natural gas provider depends on cold weather to drive sales. While the company can estimate sales based on temperature predictions (using heating or cooling degree day – HDD /CDD – indexes) and create a supply portfolio accordingly, if the winter is colder than expected then the company will be forced to enter the market to buy more gas when prices are at their highest. To hedge this risk, the company can buy a natural gas-linked weather derivative. “If the temperatures are over a certain strike we’ll sell the company natural gas at a fixed or indexed price, allowing them some comfort that they won’t have to purchase in a high price environment,” says Windle. Should the winter be warmer than expected, a put position then allows the company to sell any excess inventory at the end of the season at a predetermined or indexed price, allowing the company to better match their volumetric and price exposures in one combined product.

“There’s quite a bit of appetite for these products,” says Windle. That appetite is not limited to the US. Whereas energy companies in Europe traditionally hedge volumetric risk from warm winters, many gas distribution companies in the UK now hedge price risk from colder than expected winters. “If it’s much colder than normal, short-term natural gas prices in the UK tend to spike more than they do on the European continent,” says Jens Boening, managing director Europe & Asia at WeatherBill, which provides customised products to end-users from utilities to small businesses. Boening points out that end-user demand in Europe is not met efficiently in the traded market, as standardised products (such as those based on HDDs at London Heathrow) leave significant basis risk. Cross-commodity products are therefore attracting new end-users to the market, and increased volumes from established

Nicholas Ernst, Evolution Markets: “Weather is becoming a cross-commodity market, and around 20% of our business now comes from these deals, up from about 10% a year ago”

energy risk 27


Weather derivatives

counterparties. “Weather is becoming a cross-commodity market, and around 20% of our business now comes from these deals, up from about 10% a year ago,” says Nicholas Ernst, head of the weather derivatives group at broker Evolution Markets. “The growth in the market is not just coming from new endusers, but also increased risk transfer from the natural gas, power and heating oil markets.”

“WeatherBill will definitely give the end-user market a boost” Jens Boening, WeatherBill

Harvesting new business Advances in deal structuring, combined with soaring grain prices, have drawn significant interest in weather risk hedging from the agriculture sector. “There is weather risk in the entire agricultural value chain, only a portion of which is covered by Federal crop insurance,” says the WRMA’s Malinow. “At these unprecedented price levels, there is more absolute value to lose than ever before.” Weather risk manager and information provider Storm Exchange has seen its business grow dramatically, thanks in no small part to the agricultural sector. The company has tripled its staff in the past 12 months, hiring experts in agronomy and agricultural meteorology to meet growing demand. Storm Exchange has developed crop-specific indexes, based on how weather impacts yield and crop growth, and offers structured derivative products around them. “The convergence of energy risk and agricultural risk is now more prevalent than ever, given the effect of yield and price volatility on many of the largest ethanol producers,” says David Riker, president and CEO of Storm Exchange. “The deals we’re doing now are multi-year contracts worth hundreds

“Since its inception, the weather markets have faced challenges, but they continue to be resilient” Felix Carabello, CME Group

28 energy risk

of millions of dollars, whereas only a year ago we were dealing with more middlemarket clients.” Brian O’Hearne, managing director, financial products at Swiss Re, says that agriculture is clearly the fastest growing end-user sector, as awareness of weather’s impact on crop yield – and how to hedge this risk – improves across North and South America. “We’ve seen interest from Australia, South Africa – anywhere with an agricultural economy has a need for weather derivatives,” he says. One such economy is India’s, where 55% of the population (around 621 million people) depend on agriculture for their livelihood. The sector contributes 18% of India’s GDP, equivalent to $748 billion. Weather risk is concentrated in precipitation: 75% of the country’s annual rainfall of 110 centimetres occurs during the summer monsoon season between June and September. In addition, 26% of India’s power generation comes from hydropower. “Higher or lower than normal rainfall can create a huge problem for the economy, particularly large sections of the rural population,” says Kolli Rao, chief manager of the Agricultural Insurance Company of India (AICI). “Weather derivatives and insurance could therefore be a huge market here.” Janani Akhilandeswari, a consultant at The Centre for Insurance and Risk Management (CIRM), estimates that India’s OTC weather derivatives market is worth around $1 billion. At the moment, exchange-traded weather derivatives are not permitted under Indian law as they are “intangible assets”, but a bill being considered by the government is likely to allow trading in commodity options, weather derivatives and index futures within the next 12 months. Index-based weather insurance products currently meet the demands of the agriculture sector. “We are currently working with the National Commodity and Derivatives Exchange [NCDEX] in designing and pricing exchangetraded weather derivative products to be traded once the regulatory barriers are lifted,” says CIRM consultant Rupalee Ruchismita. “We see huge potential in this market.” The Multi Commodity Exchange of India (MCX) is also said to be considering launching weather derivatives, according to AICI’s Rao. Kendall Johnson, managing director and global head of weather derivatives at broker

energyrisk.com


Weather derivatives

“The auction might come from one country and place the risk in two different countries or time zones. It’s becoming a truly global market and the auction format helps us to cover that” Kendall Johnson, TFS Energy

funds were reportedly keen to trade as the index was a counterparty of unprecedented size in the market. Some participants aren’t so enthusiastic though. “When UBS enters the market it creates a ripple effect,” says one weather market participant. “It’s a problem for the market when someone puts out an auction, instead of taking a more calculated approach to execution. When someone comes in and shows their entire hand it pretty much paralyses the market for a lengthy period of time.” Another participant observes that, as the index is weighted for locational liquidity rather than seasonal liquidity, the exposures are greater in October to April, instead of being weighted towards the more liquid midseason. “Conceptually it’s great, but I question the longevity of it, given the way it’s being executed,” he says. However, the majority of feedback from the market on the UBS index is positive. “There’s now plenty of liquidity in the market to absorb structures like this,” says Swiss Re’s O’Hearne. “Investors are looking for diversification, and weather derivatives offer very good non-correlated returns.” Murisic told Energy Risk that he is now developing an investor index based on potential Indian precipitation contracts, to be listed on the NCDEX. “The Indian monsoon derivatives market could be one of the world’s largest in terms of volume,” he says. He is also hoping to develop an index for the burgeoning hurricane derivatives market (see ‘Hurricane derivatives’ box).

Investors may be poised to play a major role in the weather market’s expansion, but there is a consensus among participants that growing end-user business is the key to assuring longterm market integrity. “From the beginning people thought our markets would be revolutionary, but they have been evolutionary,” says RenRe’s Windle. “There is no next big thing that will come in and double market volumes, but I’m confident that there will be continued double digit year on year growth in the trading of weather-related products.”

Bright forecast One platform seeking to harness the global potential of weather risk management is WeatherBill, by offering a service that allows businesses to customise, price and buy weather coverage online. Since being founded in 2006 it has protected a diverse range of clients, from travel companies to car washes and hair salons. The company itself does not actively trade the market, but rather develops a portfolio of offsetting – negatively correlated or uncorrelated – weather derivative contracts. WeatherBill offers online access to around 20 different contract types combining temperature, precipitation, snow and frost across seven countries including the US, UK and Germany. “We are the first to offer this level of customisability in terms of the indices available and weather stations being offered – we will definitely give the end-user market a boost,” says WeatherBill’s Boening, formerly of Merrill Lynch and vice-president of the WRMA. “Our mission is to democratise the weather market.” WeatherBill is currently seeking registration with the UK’s Financial Services Authority, which will allow it to offer its products to every UK business. The level of granularity offered is very different to the standardised CME contracts that have so far been the market driver. “Companies like WeatherBill and Storm Exchange provide an invaluable service, a different kind of risk transfer tool

“Higher or lower than normal rainfall can create a huge problem for the economy, particularly large sections of the rural population [in India]. Weather derivatives and insurance could therefore be a huge market here” Kolli Rao, AICI

30 energy risk

energyrisk.com


Weather derivatives

“The good news is that there is new appreciation that falling asset prices don’t change the temperature in London” Martin Malinow, Galileo Weather Risk Management & WRMA

from us,” says CME Group’s Carabello. “It’s more customised, less commoditised.” Market veterans Brian O’Hearne and Bill Windle view WeatherBill’s emergence as the next step for the market. Windle feels the increased liquidity will benefit all market players. “The tide will rise, and as it rises it will lift all boats,” says Windle. “I wish WeatherBill success, because it will be beneficial to all of us.” O’Hearne meanwhile points to Swiss Re’s agreement to provide risk capacity

to CelsiusPro, a Europe-focused platform similar to WeatherBill, as a signal that online origination could be the way forward. With end-user and investor interest on the rise, the forecast looks bright for continued growth in weather derivatives trading, despite the testing times currently being experienced in the global markets. Indeed, the very nature of the weather market means it may benefit as institutions seek diversification. Malinow is cautiously optimistic. “We haven’t seen much impact on weather markets so far, but it would be naive to think there won’t be some fallout given the general credit contraction and deleveraging we have been facing,” he says. “The good news is that there is new appreciation that falling asset prices don’t change the temperature in London.”

Hurricane derivatives Index-based hurricane futures and options, launched on the CME in March 2007, stand at the crossroads between the insurance / reinsurance industry and the capital markets. The products were formulated in a joint-venture between specialist reinsurance company Carvill, the index provider, and CME Group as a result of the devastating 2005 hurricane season, which caused an estimated $79 billion worth of damage. Such was the hit on the insurance market that some claims from Hurricane Katrina remain unsettled. “The problem that the reinsurance companies faced was a concentration risk – companies had been warehousing risk so it was concentrated too much in one space,” says CME Group’s Felix Carabello. “Some reinsurance companies believe that warehousing of risk was an unsustainable business model and they realize that they have to shed their risk through different types of counterparties accessible through CME Clearing.” Insurance companies previously insured their risk through a reinsurance contract called an Insurance Loss Warranty (ILW), brokered by companies such as Aon or Guy Carpenter. Now products such as catastrophe bonds, which pay out to investors based on large weather events, or ILW-based insurance futures (traded on London-based Insurance Futures Exchange, IFEX) are allowing hedge funds, investors and energy companies to hedge hurricane risk, at the same time diversifying the insurance market. The CME contracts have increased accessibility to the market, as they do not feature an indemnity piece; no receipt for loss needs to be shown to guarantee a payout (unlike ILWs). “With these futures you can parametrically calculate the risk and infer statistical losses, and it settles immediately,” says Ilija Murisc of UBS. “For a utility company that’s very useful.” The underlying index measures hurricane size and maximum wind speed. Contracts trade at $100 for each 0.1 points on the index. A relatively small hurricane with a 60-mile radius and 74

32 energy risk

mph winds would score 2.5 on the index. Hurricane Katrina would have scored 19. “The Carvill index is a more precise proxy for storm damage and intensity than the Saffir-Simpson scale [which rates hurricanes in categories 1 to 5]” says Martin Malinow of Galileo Weather Risk Management. “It’s a purely parametric index, so it’s effectively a weather derivative and seems to be a product that’s here to stay.” Nicholas Ernst of Evolution Markets, which recently set up a desk to broker cat bonds, ILW derivatives and the CME’s hurricane futures, says that hedge funds prefer to trade the CME/Carvill futures as the index format is ideal for algorithmic trading. “The problem is that it doesn’t fully cover all insurances risks – it leaves significant basis risk,” he says. “Right now it’s maybe too big a leap from the way business is traditionally done, but the market is two or three years away from really exploding.” After little interest in 2007, an active 2008 storm season has seen 32,600 hurricane contracts traded on the CME up to August this year; notional value has yet to be calculated, according to the CME. Swiss Re’s Brian O’Hearne says that more point-specific and location-specific products have helped to encourage insurance companies to trade on exchanges. “Insurance derivatives are poised for significant growth,” he says. One participant who wished to remain anonymous says that many insurance hedge funds are up 10-15% for the year, because they are uncorrelated to floundering financial markets. “With AIG having gone belly up there will be more reinsurance opportunities,” he says. “The fact these assets have done well when everything else has performed poorly means there will be significant capital inflows.” And of course, institutional and retail investors are on the lookout for uncorrelated assets. “There are opportunities to create an index in the catastrophe markets, just as UBS has done in the weather markets,” says Kendall Johnson of TFS Energy.

energyrisk.com


Solutions

Getting a grip on climate risk A new index lets investors express their views on how fast the planet is warming

cities – including New York, Chicago, Atlanta, and Las Vegas – that are most actively traded on the CME’s weather derivatives exchange. Between May 2 and September 3 this year, an excess temperature of 0.68ºF on these contracts caused the index to climb by almost 35%. This performance showed minimal correlation with any other investible asset class, a fact that could make the climate an interesting candidate for inclusion in otherwise traditional portfolios. Access to the index would be via structured products, perhaps in combination with other types of asset. More cities could potentially be included in the index. The CME currently trades weather derivative contracts for 18 US and nine European cities, as well as six Canadian and two Japanese locations. To be eligible for inclusion in the GWI, however, the volume of futures traded for any given city must represent 1% or more of the total weather derivatives contracts traded A broader swathe of investors can now give climate derivatives a whirl on the CME. Provided they meet this condition, European and Asian cities are likely to be included in the GWI over the meWeather derivatives have been traded Bank to come up with the world’s first dium term. A UBS-GWI governance comfor the best part of a decade. In theory, ski index that tracks temperatures on a mittee will meet annually to determine resorts could use them to hedge against national and regional rather than a local the composition and the weighting of the warm winters or brewers to protect them- basis. Launched in April this year, the UBS UGWI index and its family of sub-indices, selves against cool summers. In practice, Global Warming Index (UBS-GWI) is a trad- which currently covers four US regions: the though, most users are in the energy secable benchmark for global investments in Northeast, Midwest, West and South. tor. The Chicago Mercantile Exchange the weather derivatives market. It provides Although there has been a dramatic in(CME) established a weather derivatives a rational and simple way to obtain finan- crease in weather derivatives volumes over exchange for temperature contracts refcial exposure to large-scale trends in the the course of the last few years, traded erenced to certain US cities in September climate. The index should also prove useful products using weather remain inacces1999, later adding European and Asian to industries that need to hedge against sible to the vast majority of the financial references. More recently, the CME has damaging climatic trends. Potential users community. Used mainly as a hedging inadded contracts on snowfall, frost and could include many branches of agriculstrument by energy, insurance and comhurricanes. These innovations helped lift ture, tourism and construction. modity professionals, weather derivatives total CME turnover in weather contracts remain largely untouched as an asset to some $45 billion in 2005 –2006. This How it works class in their own right. UBS’s new Global success has attracted attention elsewhere. The UBS-GWI is based on existing CME Warming Index could change that by proIn mid-2006, China’s Dalian Commodities weather futures contracts that settle on viding a simpler way for a broader range Exchange announced that it planned to the difference between the average daily of institutional and private investors to start trading weather futures, with the aim temperature and a base temperature of gain financial exposure to global temperaof helping Chinese farmers hedge their 65ºF. These are Heating Degree Day (HDD) ture trends. exposure to bad weather. and Cooling Degree Day (CDD) contracts, Weather, though, is not climate. As cliso-called because they measure how far it Ilija Murisic UBS Investment Bank, matologists like to say, weather is what is necessary to heat or cool buildings in the Non-standard derivative products you get while climate is what you expect. prevailing weather conditions. At present, ilija.murisic@ubs.com This insight prompted UBS Investment the index comprises contracts on the 15 US 14

UBS News for Banks / Winter 2007


Solutions

Inconvenient truth: now you can hedge against it with the UBS Greenhouse Index

Turning up the heat New index broadens the choices for investors concerned with climate change Unless you are a dairy farmer in Greenland, climate change is an inconvenient truth. For most such inconveniences, though, there is a convenient tool for hedging their effects. Climate change was the exception until April last year, when UBS launched its Global Warming Index (UBS-GWI). Rolling into a single instrument a selection of intensively traded weather derivatives, the index offers investors a new and handy way of expressing views on regional or national climate trends in the US. (See News for Banks, Winter 2007 edition for more details.) This invitation was taken up with enthusiasm. Since inception, the Global Warming Index has attracted some $100 million in contracts. Even more significantly, it has built a new user base for weather derivatives. While traditional weather futures tend to be patronized mainly by energy professionals and a few specialized hedge funds, the GWI has pulled in insurers, pension funds, and even retail investors. GWI investors have been rewarded by a 53% rate of return since inception (as at midFebruary), as well as minimal correlation with other asset classes.

If it chooses, this clientele can now focus even more selectively on the humaninduced element in climate change. The recently launched UBS Greenhouse Index (UBS-GHI) is a play on both temperature trends and, indirectly, on the amount of carbon dioxide in the air, an important cause of global warming. Half the index by value is based on the existing Global Warming Index, while the other half tracks futures contracts on two principal markets for carbon emissions, the EU Emission Trading Scheme (40% of the index) and the Kyoto Clean Development Mechanism (10%). Thus the index delivers exposure to temperatures across a selection of US cities, as well as prices for carbon dioxide in the EU and for carbon dioxide reductions sold by developing nations to developed ones. For investors preferring to concentrate solely on greenhouse gas emissions, a family of sub-indices is available that track either the European emissions trading scheme or the Kyoto Clean Development Mechanism or both in combination. As in the emissions part of the parent index, the European scheme accounts for

four-fifths of the combined emissions index by value, reflecting its greater underlying market volumes. As index components are weighted according to the volume of underlying transactions, new weather contracts or carbon reduction schemes could be added to the GHI in future, if justified by their popularity. As the existence and pricing of carbon reduction schemes depend wholly on human agency, the GHI is a more complex instrument than its predecessor. It should appeal to institutional investors looking for additional portfolio diversification, reckon the productâ&#x20AC;&#x2122;s designers within UBS Investment Bankâ&#x20AC;&#x2122;s hybrid derivatives trading unit. Other users could include businesses exposed to the risk of adverse climate change and those that need to hedge against the risk of legislation designed to curb carbon dioxide emissions. You could even sell the index short to hedge against the unlikely risk of global warming going into reverse. Ilija Murisic UBS Investment Bank, Hybrid Derivatives Trading ilija.murisic@ubs.com UBS News for Banks / Summer 2008

19


Solutions

The sea may be calm but the freight rates are volatile

Blue Sea thinking A new index on sea-freight derivatives helps investors tap into the China story In the same week that UBS launched its Blue Sea index on freight derivatives, the 203,512-tonne bulk carrier China Steel Team was booked to carry iron ore from Brazil to China. At a record-breaking $303,000 per day, the freight rate was more than three times higher than the ship’s last fixture, just one month previously. China Steel Team is one of fewer than 600 Capesize bulk carriers in the world. And as the name of this particular one suggests, China’s prodigious appetite for raw materials is keeping all of them busy. That’s not surprising, when you consider that Baosteel, China’s leading steel producer, needs 150 ship-loads of ore every year to feed its blast furnaces. Statistics like these explain why sea freight rates are rocketing, particularly for dry bulk cargoes such as iron ore or coal. According to Simpson Spence & Young, a consultancy, average dry bulk freight rates reached almost $220,000 per day in May, up from $80,000 or below in January and a previous long-term average of $15,000 – $20,000. Capacity shortage is responsible for part of this squeeze but a lack of tonnage is not the whole story. Even if the 185 or so Capesizers on order could be delivered tomorrow, ports and cargo terminals are too choked with shipping to allow them to load and unload

on time. The upshot is a rising trend in freight rates, coupled with spectacular volatility; the benchmark Baltic Exchange sea freight index for dry commodities sagged by more than a third between November last year and mid-January 2008 on fears of a US recession, although it has since bounced back. That volatility, of course, has already attracted banks, hedge funds, and other financial institutions. So far, would-be investors have looked to the existing markets for sea-freight derivatives, which are based mainly on futures and forwards on the principal reference indices. What was lacking, however, was a packaged instrument that offered a balanced exposure to a representative spectrum of the dry-bulk freight market. It was this gap that UBS sought to fill when it launched its Blue Sea Index on May 22. Congestion factor UBS Blue Sea is the first fully integrated index to be benchmarked on the most actively traded dry-bulk forward freight agreements. FFAs are non-standardized over-the-counter forward contracts based on one of several underlying freight indices. They are agreed between two parties for a specific route, for a specific delivery rate and a specific vessel type. The index

also incorporates a “Port Congestion Factor” that takes into account the effect on freight derivative prices of loading or unloading delays in more than 60 iron ore and coal ports worldwide. The index is aimed primarily at investors who are interested in freight as a generic asset class. In addition, shipowners and charterers could use the index to hedge their total exposure to freight rates. For this purpose, sub-indices are also available. These are based on the three categories of bulk carriers that comprise the main index, namely the Capesize giants and the handier-sized Panamax and Supramax types. It’s too early to say which types of investor will make the most intensive use of the new index. But Blue Sea has certainly captured the attention of industry experts. Lloyds List, the longest-standing daily newspaper for the maritime industry, commented as follows: “This new UBS initiative deserves to be watched as it may introduce a new level of sophistication to the freight derivatives market by opening it up to investors who are not necessarily freight professionals. The Blue Sea Index is indeed blue sky thinking.” Ilija Murisic UBS Investment Bank, Hybrid Derivatives Trading ilija.murisic@ubs.com UBS News for Banks / Autumn 2008

15


!""""""""""""""""""""""""""""""""""""

!!!!!!!!!!!!!!!


WEATHER Derivatives

Weather Derivatives

Cherry Reynard reports on the latest hot product to change the derivative landscape According to

the Chicago Mercantile Exchange, weather has an impact on revenues for around 30% of the US economy. For many companies, this is higher than foreign exchange risk or other types of risk that are widely hedged. With the impact of climate change making weather conditions more unpredictable, the business risk from weather looks set to rise. Yet, the majority of companies do not hedge against the weather and weather derivatives remain a young and relatively immature market. Is this likely to change as climate change becomes more potent? The first widely-known weather derivatives deal was completed between fallen energy behemoth Enron and Koch Energy in 1997. It was structured around temperature conditions: Like a spread betting deal, Enron would pay Koch $10,000 for every degree the temperature fell below a set level, while Koch would pay the same for every degree above it.

34 ALTERNATIVES

It was picked up by energy companies who found that fluctuations in weather were hampering their ability to deliver steady earnings to investors. Peter Brewer, chief investment officer of Cumulus Funds, says: “It came down to people would use gas if it was cold to heat things up and electricity if it was hot to cool things down. The contract would pay money out if the temperature changed.” Insurance companies then became involved, who saw it as a means to move risk around. In 1999, the Chicago Mercantile Exchange (CME) began to list temperature futures. These were vanilla contracts based on the temperature in certain cities on certain days. Brewer says that this was an attempt to turn what had been an over-the-counter market into an exchange-traded one, but it generated little interest from any of the market participants at the time. The implosion of Enron in late 2001 caused considerable dislocation in this nascent market. It had been the biggest player and the market was left with a disparate bunch of investors and traders, which included some insurers, some banks and some energy companies. But Enron employees started to move into the insurance groups and banks and resume trading there. Brewer says: “It really started to happen postEnron. There was more focus on counterparty risk. The Chicago Mercantile Exchange removed that credit risk and began to pick up a lot more business. By 2002, it had a 90% share of trading activity in weather derivatives.” The weather derivatives market now splits neatly into two main areas: There is the secondary market, which trades on the CME and then there is the more esoteric off-exchange market, which allows for more structured deals. According to statistics from the Weather Risk Management Association (WRMA), around 730,087 derivatives contracts were traded from April 06 to March 07. This was down on the previous year when hurricanes Katrina and Rita increased the appeal of hedging weather risk and over one million contracts were traded. Hurricane Katrina, in particular, proved one of the most costly in US history, with estimates of damages around USD65bn. Volumes on weather conditions in the US were largely stable, while European contracts declined. However, the WMRA said that it was seeing rapid underlying growth in the weather business in other regions of the world, notably India, which are yet to be captured in the survey. The WRMA says that early indications for the 2007/2008 survey period


WEATHER Derivatives suggest that the number of contracts traded will be nearer the 2005/2006 figures. If catastrophic weather conditions continue to be a predictor of trading volumes (as they have been in the past), then 2008/2009 is likely to be even stronger, encompassing the earthquake in China, cyclone in Burma and further hurricanes in the mid-West of the US. For the exchange-traded market on the CME, the main volume is in contracts on heating degree days (HDD) and cooling degree days (CDD) on 18 cities around the world. Temperature contracts accounted for volumes of USD18.9bn in 2006/2007. Although much of the trading is in US cities, CME offers futures on temperatures in Amsterdam, Barcelona, Berlin, London, Madrid, Paris, Rome and Stockholm. These are well-traded, liquid contracts and are mostly traded by energy companies, funds (including hedge funds) and insurance companies. The presence of large energy companies means most arbitrage opportunities quickly disappear. The CME has tried to expand its range recently, finding that demand for weather hedging goes beyond temperature. As such, it has introduced products focused on frost, snowfall, rainfall and even a hurricane future. However, trading in these areas remains relatively limited with rain and wind contracts attracting volumes of just USD142 million and USD36 million respectively in 2006/2007. The key problem for the CME in developing new products remains access to quality data. Eric Gisiger a member of the investment committee of Man ECO says that few companies actually understand the impact the weather has on their bottom line. He adds: “They know they might get depressed results due to poor weather conditions , but have less of an idea how much is attributable to the weather and therefore how much they need to hedge. Available standardised weather contracts such as the ones traded on the CME could be used but usually have a basis risk, in other words do not perfectly hedge the underlying risk.” He believes that although these contracts are useful, they can only ever represent standardised hedges. There is therefore a basis risk. The weather in central London is not necessarily the same as in Heathrow and therefore the standard products do not always reflect the exact market risk. The off-exchange weather derivatives are only marginally captured by the WRMA statistics. Examples of this type of contract could be whether it is going to rain at a sporting event or whether it will snow in Meribel this season. Stephen Doherty, chief executive officer at Speedwell Weather, says: “These more exotic structures will be based on the fair value for the trade plus a profit margin for taking the risk. These products are unlikely to trade thereafter.” These tend to be smaller volume trades, but there are

more in the market. It is difficult to quantify the exact size of the market as there is no centralised data point, but it is thought that this market is now much larger than the exchange-traded market. Catastrophe, or "cat" bonds are also a growing area. These are issued by insurance companies and designed to cover particular risks. Investors will buy on the assumption that an event won't happen. If the event happens, the investors lose their money and the insurance company makes enough money to cover a proportion of the money it has to pay out to its clients. These bonds are also being picked up by hedge funds in a blurring of the lines between insurers and weather derivatives investors. Traditional 'catastrophic' events have been seen as the domain of the insurers alone. The corporate users of these products are disparate. For example, the CME launched snowfall futures and hurricane futures primarily to help state governments manage their budgets. In addition to energy companies, beverage producers are subject to the vagaries of the weather - Britvic, for example, made several references to its vulnerability to weather conditions in its recent results statement. Construction projects can be influenced by the weather as can ski resorts and other holiday groups. Retailers are often affected by high rainfall and poor conditions as people don't tend to go out shopping. On the other hand, WH Smith benefited from last year's terrible weather because people stayed inside and read books. San Francisco-based WeatherBill has just published a study identifying the relationship between weather conditions and flight disruptions. It showed that 14% of the 21 million flights evaluated in the study were delayed or cancelled due to weather. More than 25% of all flights studied were cancelled or delayed of which 55% of those disruptions (3 million flights) were weather-related. The survey showed some airports such as San Francisco, Reno and Chicago's O'Hare suffered disproportionately from weather-related delays. These corporate will use the basic contracts available to them on the CME and Stephen Doherty, also structure their own deals if they chief executive officer need more tailored, specific hedging. They need to make sure that this type of at Speedwell Weather hedging is cheaper than insurance. Doherty says that some of the most complex deals are now within agriculture. This has felt the early effects of climate change most significantly with crop destroyed by poor weather conditions. He adds: “There has been an explosion in this area. Weather conditions affect crops - including rain and temperature. Timing is also important. You are seeing some exotic weather structures in this area.”

“This market is still very immature and still very opaque, that's why hedge funds like it”

ALTERNATIVES MAGAZINE 35


WEATHER Derivatives Investment buyers of weather derivatives will tend to be standard investors such as pension funds and asset managers looking for a non-correlated asset class. This is where UBS has seen most demand coming for its Global Warming index (see box-out). Gisiger says that hedge funds active in the space also look at the non-exchange traded , insurance market. He says: “This market is still very premature and opaque, a key reason why hedge funds like it. The bespoke insurance market is bigger and more attractive in terms of potential margins to be earned but also requires a specific skill set rarely available. Market participants assume that a lot of the hedge fund money goes into the bespoke deals, though there are hedge funds actively trading through CME contracts. ” There are a number of specific weather funds investing in the derivatives market. Brewer runs the Cumulus Climate fund, which launched in February, and has a technical, quantitative-driven approach. The fund is a long-short equity fund which seeks to profit from the financial impacts of climate change. It has not been running long enough to deliver meanThe UBS Global Warming index The UBS Global Warming index (UBS-GWI) is the only index that currently exists for the weather derivatives markets.The index grew out of demand from multi-asset clients for new uncorrelated assets. Ilija Murisic, Executive Director, Hybrid Derivatives Trading at UBS says: “In 2007, the equity and commodity markets had rallied and investors were looking for asset classes that were truly uncorrelated.We started to look at weather derivatives and thought they were a very interesting market.There was empirically no correlation with equities.” The UBS-GWI was launched in May last year and is constructed using the Heating Degree Day (HDD) and Cooling Degree Day (CDD) weather futures contracts traded on the CME.The index is currently composed of weather futures contracts on 15 U.S. cities.To be eligible for inclusion, the volume of futures traded for any given city must represent 1% or more of the total weather derivatives contracts traded on the CME. At the moment, futures on New York weather form the largest part of the index at 31%. Cities from Europe and Asia are expected to become part of the index in the medium term. The UBS-GWI Governance committee meets annually in September to revisit the weightings of the index and its sub-indices family (currently composed of four US regions: Northeast, Midwest,West and South). Since launching this index, UBS has moved into similar areas, launching carbon trading, energy, commodities and freight indices. Murisic believes there is good potential growth in these markets, pointing out that the weather derivatives market has grown from $2.2bn in 2004 to around $40bn in 2007. Murisic says that although the underlying instruments are complex, the index itself is designed to be very simply and trade like the S&P index. Investors don't need to look at seasonal variations.The index performance has moved from around 100 at launch to around 250 today. Investors have been varied. Murisic says: “We have had a lot of interest from insurance companies. Many of our investors come from Europe, particularly Scandinavia and from Asia. Hedge funds have not been a big buyer, but there has been a lot of interest from wealthy private individuals. Asset managers and pension funds use the asset class to diversify - they have an allocation to alternatives and they put some of it into weather.” In general, he believes that interest has not come from specialist weather funds and weather investors, but more from normal investors looking for diversification.

36 ALTERNATIVES

ingful performance statistics, but Brewer says that it has been run on a formal 'paper trading' basis for 16 months and delivered annualised returns of over 15% to end-December despite considerable volatility. It targets 15-20% returns on 10% volatility. The Nimbus fund, based in Bermuda and run by Nephila has also proved popular. The Nephila spider can apparently predict hurricanes, spinning its web close to the ground when a hurricane is approaching and high up in the shrubs and trees when the weather is nice. The group has recently signed an agreement to provide risk capacity and collateral to WeatherBill to support weather contracts sold to customers. There are also a number of more mainstream weather-related investments launched in the retail market such as the Schroders Climate Change fund and the Virgin Climate Change fund. This demonstrates that demand is there among retail investors for this type of product, but so far these have been entirely equity-based. So how big is the weather derivatives market likely to become? Doherty says: “The Enron idea that weather derivatives will be as big as FX is not realistic. Weather risk is important, but the market will grow quietly. It will be resilient but unexciting. There is a flexible and deep pool of capital and so far the ability of the market to adapt and step up to the plate has been surprising.” Hel believes there is ample capacity in the market and it won't be constrained by a lack of capital. Gisiger says that at the moment corporate buyers are restricted by the assumption that weather is simply a hazard of day-to-day business and therefore does not need to be hedged in the same way as other risks, though he believes more companies are becoming aware of the options for hedging their weather exposures. Brewer concludes: “A lot of people said in the early days that this could be the biggest business on the planet. That's not something we would argue. This is a specialist market for companies concerned about the weather. It will grow, but we are not about to see a doubling of volumes every year. That said, more companies are becoming aware of the possibilities and we are seeing more catastrophic weather conditions.” For the market to take off, there would have to be increased shareholder pressure on corporates to hedge out weather risk, plus an increased number of investment buyers seeking uncorrelated returns. As yet, there is little shareholder pressure, but corporate are becoming aware of the potential of the weather derivatives market and a growing number of buyers are looking for new, alternative asset classes to hedge out risk. Increased unpredictability of weather conditions is also likely to stimulate demand. The market is unlikely to see the sort of bullish participants it had in Enron, but should see steady growth over the next few years. A


Panorama â&#x20AC;&#x201C; 17-Jul-08


30 Børsen

FINANS

Fredag den 27. april 2007

Væksten for islandske banker bremser op To islandske banker er kommet med kvartalsregnskaber, der viser lidt lavere vækst end hidtil ■ Banker AF DAVID BENTOW

Væksten i de islandske banker, der de seneste år har været nærmest eksplosiv, er ved at stilne lidt af. For Kaupthing Bank steg bundlinjen i første kvartal med 7,9 pct. i forhold til samme periode sidste år, til 20,3 mia. islandske kronur (2,1 mia. danske kr.), mens egen-

kapitalforrentningen blev på 27,6 pct. mod 42 pct. for hele 2006. »Første kvartal sidste år var fantastisk, og regnskabet sidste år var bl.a. også påvirket af salget af aktier i Exista, men eksklusive engangsposter var egenkapitalforrentningen på 28 pct. i 2006, det vil sige på samme niveau som første kvartal i år,« siger koncernchef Hreidar Már Sigurdsson til Børsen.

Meget tilfreds Han er i øvrigt »meget tilfreds« med udviklingen i Kaupthings største datterbank, danske FIH Erhvervsbank. »Siden vi blev ejere af FIH i 2004, er både antallet af ansatte og bundlinjen blevet

fordoblet, og det er lykkedes at tiltrække nogle særdeles attraktive medarbejdere,« siger Sigurdsson. På trods af det islandske ejerskab har FIH beholdt sit eget navn og identitet. Sådan vil det formentlig fortsætte. »Indtil nu har vi anset det for vigtigt at holde den separate identitet, bl.a. fordi FIH-navnet er meget kendt og respekteret på de europæiske obligationsmarkeder, hvor de henter kapital. Og i England bruger vi også fortsat Singer & Friedlander-navnet,« siger Hreidar Már Sigurdsson, der dog direkte adspurgt siger, at det »ikke er utænkeligt,« at FIH på et tidspunkt vil skifte navn til Kaupthing. Også investeringsbanken

Straumur-Burdaras kom med regnskab i går, samtidig med at det blev meddelt, at der vil blive åbnet et kontor i Stockholm. Investeringsbankens bundlinje faldt i første kvartal til 69,2 mio. euro (516 mio. kr.) mod 217,5 mio. euro i første kvartal sidste år. 2006-tallene var dog påvirket af et salg af en aktiepost på 21,1 pct. i Islandsbanki, der i dag hedder Glitnir.

Fantastisk år »Begyndelsen af 2006 var helt fantastisk på aktiemarkederne, og det afspejlede sig i vores resultat. Men i år har vi fortsat kunne notere vækst i både nettorente- og gebyrindtægterne, og vores egenkapitalforrentning på

Global opvarmning skaber ikke kun indsøer i en ellers tilfrossen norsk fjord, den giver også storbanken UBS mulighed for at oprette et nyt finansielt indeks. Foto:Scanpix

Global opvarmning indtager finansmarkedet ■ Klima AF SIMON R. NIELSEN

LONDON – Klimaforandringer er for alvor rykket til toppen af dagsordenen i den globale finansielle sektor. I løbet af denne uge bliver det langt nemmere at afdække risikoen eller udnytte muligheden for, at der sælges mindre vintertøj og flere is i varmen. Seneste skud på stammen er nemlig lanceringen

af verdens første indeks, der direkte er bundet op på underliggende forandringer i klimaet. Det er storbanken UBS, der står bag det nye Global Warming Index, som rent teknisk er baseret på eksisterende finansielle instrumenter på råvarebørsen i Chicago. Her kan man allerede i dag købe og sælge futures-kontrakter, hvor det underliggende aktiv er temperaturen i store amerikanske byer.

Det er imidlertid første gang, at de mange muligheder samles i et indeks, der direkte kan afspejle de omskiftelige vejrfænomener og udsving i temperaturen, som menes at berøre den globale opvarmning. Helt enkelt vil Global Warming Index stige, hvis temperaturen stiger. UBS har store ambitioner om, at det ny indeks bliver bredt forankret blandt investorer, der dels ønsker at sikre sig mod klimafor-

andringer, og som samtidig har en unik egenskab i og med indeksets udvikling er helt uafhængig af bevægelserne på aktie- og obligationsmarkedet. I de senere år er markedet for vejr-kontrakter steget betragteligt på Chicago Mercantile Exchange. I årene 2005 udgjorde værdien af handlede kontrakter 53,4 mia. kr. Sidste år steg markedet til næsten 250 mia. kr., viser en analyse fra Pricewaterhouse ifølge Financial Times. »Global opvarmning har skabt mere volatilitet i temperaturer og vejrforhold, hvilket har medført større likviditet i handlen med vejr-derivater,« siger direktøren for handel med hybride derivater, Ilija Murisic, til Financial Times. Tidligere i år har finanshuset Lehman Brothers udsendt en meget omfattende rapport om de erhvervsmæssige og finansielle konsekvenser af den globale opvarmning. Finansmarkedets store interesse for klimaforandringer blev for alvor vakt til live, da den tidligere verdensbankøkonom Nicholas Stern på vegne af den britiske regering konkluderede, at der er store økonomiske konsekvenser, hvis den globale opvarmning fortsætter. simon.nielsen@borsen.dk

Indt.

Res.f.sk. Resultat Dagskurs

+45% –71% –68% –2,5%

Straumur-Burdarás

Indt.

Resultat Udlån Dagskurs

+50% +6% +37% –1,7%

Kaupthing Bank

1. kvt. 2007

1.kvt. 2006

Koncern mio. ISK

1. kvt. 2007

1.kvt. 2006

11,2 Nettorenteindt. Gebyr- & provis.indt. 30,3 58,6 Rente- & gebyrindt. -38,7 Kursreguleringer 12,3 Omkst. & afskrivn. 2,9 Tab og hensæt. 77,4 Resultat før skat 69,2 Perioderesultat

5,5 27,0 40,4 62,7 8,6 3,0 264,4 217,5

16.265 Nettorenteindt. Gebyr- & provis.indt. 12.337 Rente- & gebyrindt. 28.602 13.456 Kursreguleringer Omkst. & afskrivn. 17.707 1.423 Tab og hensæt. 24.930 Resultat før skat 20.694 Perioderesultat

10.484 8.602 19.086 13.505 12.552 710 22.189 19.594

1.706,9 2.269,0 1.539,5 5.191,6

i.o. i.o. i.o. i.o.

Udlån Indlån Egenkapital Balancesum

4,98 1,11 13,2 117

– – – i.o.

7,7 EK-forr. f. skat, pct. 6,4 EK-forr. e. skat, pct. 2,30 Indtj./omkst. kr. 8,15 Udlån/egenkapital Resultat pr. aktie, ISK 26,7 Antal ansatte, gns. 2.805

Koncern mio. EUR

Udlån Indlån Egenkapital Balancesum Egenkap.forr., pct. Udlån/egenkapital Omkostningspct. Antal ansatte www.straumur.net

2.559.121 1.870.318 892.170 548.281 313.900 223.888 4.198.385 3.071.244 10,4 9,2 2,67 8,35 27,8 i.o.

Adm. direktør: Hreidar Már Sigurdsson Bestyrelsesformand: Sigurdur Einarsson www.kaupthing.com

19,9 pct. svarer til vores målsætning om 15 pct. årligt tillagt den risikofrie rente,« siger koncernchef Fidrik Jóhannsson til Børsen. Han vil dog ikke love, at banken opfylder målsætningen for egenkapitalforrentningen for hele 2007, fordi investeringsbanken fortsat ekspanderer kraftigt. »Vi ønsker at være den le-

dende investeringsbank i Norden, og vi foretager fortsat nyansættelser, også i Danmark, hvor vi kan notere markant fremgang for vores corporate finance-aktiviteter, og en god udvikling inden for vores ejendomsrådgivning og låneforretninger,« siger Johannsson. david.bentow@borsen.dk

Hedgefonde udbetaler bonus ■ Bonus AF SIMON R. NIELSEN

LONDON – Selv om hedgefond-industrien generelt møder stigende kritik for høje omkostninger og for lave afkast, fejler evnen til at forgylde personerne bag ikke noget. Undersøgelsen af bonusbetalinger i 2006 er foretaget af investeringsmagasinet Alpha Magazine, der kan berette at hele tre personer har brudt den magiske grænse på 1 mia. dollar. Godt nok er den amerikanske valuta svag for tiden, men de spekulative og avancerede fonde har eftertrykkeligt og endnu engang bevist, at de bedst formår at aflønne stjernerne i den finansielle sektor. Så her bringer vi en lille lønstatistik, som opgørelsen tager sig ud ifølge Financial Times. Jim Simon fra Renaissance Technologies tjente 9,4 mia. kr. Ken Griffin fra Citadel Investment Group tjente 7,7 mia. kr. Eddie Lampert fra ESL Investments tjente 7,2 mia. kr. Sidste år formåede bare to personer at runde den magiske milliard målt i dollars. Hele listen med de 25 højest betalte forvaltere tjente 82,5 mia. kr., hvilket ifølge Financial Times svarer til nationalindkomsten i Jor-

dan. I gennemsnit er lønnen fordoblet på to år. Bag de enorme lønninger gemmer sig en mere strukturel historie om en enorm tilstrømning af ny kapital, da især pensionskasser og andre institutionelle investorer jagter det lille merafkast i forhold til markedet, der er så afgørende. Samtidig kan mange hedgefonde tilbyde en langt højere grad af beskyttelse i dårlige tider, da de i modsætning til traditionelle investeringsfonde benytter sig af derivatmarkedet for at afdække og optimere afkast og risiko i porteføljen. Uanset baggrunden vil de store lønninger blive anset som endnu et eksempel på den grådighed, som mange fagforeninger og flere politikere hævder florerer blandt hedgefonde og kapitalfonde, der beskyldes for at splitte selskaber og skære ned, mens de forgylder sig selv og investorerne. Blandt investorer i hedgefonde er der en større forståelse for lønningerne, der trods alt er bundet op på fondenes afkast. Typisk har hedgefondene omkostninger efter det såkaldte 2-20-princip. Det koster 2 pct. om året i faste omkostninger og 20 pct. af det positive afkast. simon.nielsen@borsen.dk


Beating The TSX

Global Warming And Your Portfolio David Stanley

S

cience and politics are often at odds. The best current example is the global warming debate. Undeniably, our planet is getting warmer and this is likely to continue. An overwhelming majority of the world’s scientists agree that human activity is responsible, but politicians in many countries continue to dither about how to contain this huge problem. The object of this column is not to enter the debate but to examine investment opportunities emerging from the global warming event. To review, global warming is the current and ongoing increase in the earth’s surface (air and water) temperature. Its cause is almost undoubtedly the proliferation of greenhouse gases (carbon dioxide, methane, and other gases) due to, among others, industrial pollution. These gases form a layer around the earth that traps some of the heat from the sun, thus warming the planet and also causing more extreme weather variations. While scientists embrace this view, politicians have been slow to agree and even slower to take steps necessary to abate greenhouse gas emissions. Just as an exercise for myself, I downloaded (http:// www.almanac.com/weatherhistory/locations/index.php) some historical weather information for the site closest to me (Waterloo-Wellington Airport) that had weather records.

Figure 1 - Weather data for the Waterloo-Wellington Airport, ON, from 1976-2008.

Canadian MoneySaver

PO Box 370, Bath, ON K0H 1G0

Unfortunately, these only exist since 1976, but mean, maximum, and minimum temperatures were available, if only in °F. I picked two days, April 9 (spring) and October 9 (fall), and eight dates over the period from 1976-2008. I averaged the two days and looked at the mean temperature and the difference between the minimum and maximum temperatures (Figure 1). The slopes of both lines are upward, indicating an increase in these data, but, of course, there are too few data to draw a statistically meaningful conclusion. Readers may wish to gather data for their locations and draw their own conclusions. However, if we consult Environment Canada (http:// www.msc-smc.ec.gc.ca/ccrm/bulletin/national_e.cfm), we see that winter temperatures have generally been increasing nationally with a warming trend of 2.3°C over the last 61 years (Figure 2 shown on the next page). World data also show a distinct warming trend. Figure 3 (shown on the next page) gives results for three climate parameters. From these and other data, the IPCC predicts temperature rises of 1.1-6.4°C by 2100. The warming of our planet will have significant effects on the human population as well as all living species and the natural environment in which we exist. Economists predict reduced GDP levels, and, in particular, agriculture will face many difficulties. Some of these are grain shortages, increased food prices, more soil erosion, and loss of soil fertility. The effects of global warming will not be felt equally around the globe and Southern Africa is thought to be the most at risk. In the last several years 15 food riots have occurred, 10 of them in Africa. We need to remember that modern agricultural practices, including fossil fuel usage, massive deforestation and burning, and increased livestock production also contributes significantly to greenhouse gas emissions. Global warming is not only an environmental issue, but also a financial and economic one. Scientists and engineers, leaving politicians to argue over such subjects as the Kyoto Protocol and trading of carbon emissions, are engaged in worldwide research aimed at reducing the impact of greenhouse gases, whether by developing (613) 352-7448

• http://www.canadianmoneysaver.ca • JUNE 2008


world’s energy infrastructure away from fossil fuels will be a human activity for many years and there is a universal call for more research and development. Undoubtedly, numerous investment opportunities will arise from this work. Let’s look at some ways the individual investor can participate. First, let me say that the mention of any particular investment does not constitute an endorsement on my part. As always, you need to do your own due diligence. Several asset classes are open to investors:

• Futures trading - While this is not appropriate for either the amateurs or the faint of heart, I was Figure 2 - Canadian winter national temperatures from 1948-2008. Source: Environment Canada. surprised at the number of possialternate energy sources or reducing pollution. Reconstructing the bilities. The weather derivatives market, traded on the Chicago Mercantile Exchange (CME), is larger than I thought. Last year a new index appeared, the UBS Global Warming Index (UBS-GWI), composed currently of weather futures contracts of 15 U.S. cities, although cities from Europe and Asia are expected to join the index. The price of this index depends on the difference between the average daily temperatures and the given base temperatures. There are also specific Canadian futures, one being the Canadian Monthly Weather Heating Degree Day (HDD) index that is geared to how much below 18°C the temperature averages in a given city in Canada in a given month.

• Exchange-Traded Funds - ETFs have the advan-

Figure 3 - Changes in (a) global average surface temperature; (b) global average sea level rise from tide gauge (blue) and satellite (red) data and (c) northern hemisphere snow cover for March-April. All changes are relative to corresponding averages for the period from 1961-1990. Source: 2007 Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report

Canadian MoneySaver

PO Box 370, Bath, ON K0H 1G0

tages of providing the investor with a portfolio of stocks in a sector for a reasonable management fee. The three available sectors that match up most closely with global warming are agriculture, solar energy, and water. Here is an example of each one. The Claymore Global Agriculture ETF attempts to match an agricultural index containing companies specializing in fertilizers and agricultural chemicals (57%), farm machinery (22%), packaged food and meats (12%), and agricultural products (9%). The top 4 holdings in the ETF are Deere, Monsanto, Potash, and Syngenta, totalling 36%. The U.S. and Canada are the two top country weightings. This fund (COW on the TSX) has a management fee of 0.65%. COW began trading

(613) 352-7448

• http://www.canadianmoneysaver.ca • JUNE 2008


late in 2007 at a price of TABLE 1 - SOME POSSIBLE CONSTITUENTS OF A LARGE-CAP GLOBAL WARMING PORTFOLIO. $20.00 (CAD) and as of April 18, 2008 had adCompany Ticker Business Price ($) Yield (%) P/E vanced to $25.75 (CAD) General Electric GE (US) Electrical engineering, water purification 66.44 2.60 20.5 with a dividend yield of Johnson Controls JCI (US) Automotive control, energy management 35.05 1.50 15.5 0.84%. Waste Management WMI (US) Waste management, recycling 35.76 3.10 16.9 Alcoa AA (US) Aluminum, automobile parts 36.26 1.90 13.9 Another ETF operating Caterpillar CAT (US) Earth moving equipment 85.28 1.70 16.0 in the global warming area DuPont DD (US) Chemical, agriculture, biotechnology 52.02 3.20 15.9 is the Claymore Global SoFPL Group FPL (US) Electric utility, fiber optic network 66.44 2.60 20.5 lar Energy Fund (TAN on Archer Daniels ADM (US) Agricultural processing, ethanol 46.47 1.10 18.3 the NYSE Arca Options) John Deere DE (US) Agricultural equipment 92.68 1.10 20.8 that attempts to match the Siemens A G SI (ADR) Industrial automation, building tech 113.95 2.10 11.0 results of a global solar enMagna Intl. MG.A (CAN) Automotive systems 72.01 2.00 12.0 ergy index. The top three ITC Holdings Corp. ITC (US) Electricity transmission infrastructure 56.38 2.10 32.9 country weightings are Dow Chemical DOW (US) Chemical, plastic, agricultural products 39.98 4.30 10.5 China, Germany, and the Honeywell Intl. HON (US) Diversified tech. and manufacturing 60.99 1.90 18.2 U.S. This ETF just began Trinity Industries TRN (US) Rail services, highway construction 27.10 1.10 7.0 trading on April 15, 2008 Source: Alt Energy Stocks (http://www.altenergystocks.com) and as of April 18, 2008 was priced at $26.60 (U. S.) a definite U.S. slant. Some Canadian stocks that might be with a management fee of 0.65%. Most observers are of considered for a large-cap portfolio of sustainable environthe opinion that while the solar industry does have a viable mental development include Suncor (SU), TransCanada business model, many of the small companies in this space Corp (TRP) and Petrobank (PBG), among others. have gotten ahead of themselves considering that they have yet to turn a profit. Solar energy is very early in its growth • SRI (Socially Responsible Investing) - Last, but certainly phase and shareholders should exhibit patience, realizing not least, is the concept of investing in SRI funds that are that this is a long-term investment. dedicated to filtering out heavy polluters or those compaFinally, a third Claymore offering focuses on water-renies with a sub-par environmental record. Some Canadian lated businesses. The Claymore S&P Global Water ETF funds that use this approach include Acuity Funds, Ethical (CWW on the TSX) is composed mainly of water utilities Funds, and Meritas. Further information can be found at and water equipment companies. It has a management fee http://www.socialinvestment.ca/mutualfunds.htm. SRI of 0.60% and pays a yield of 1.52%. This ETF has been funds not only do not invest in bad corporate citizens, but trading since early in 2007 and has declined from about also use their leverage to encourage companies to under$20.00 (CAD) to a current price of $18.33 (CAD) as of take environmental reform. April 18, 2008. The top three country weightings are the U.S., France, and the U.K. As always, I hope this column will generate discussion These are just three examples of sector ETFs that are and I will attempt to answer your questions. related to global warming. Other funds are available and may be more or less suited to individual investor’s needs. David Stanley, PhD, Rockwood, ON, DavidS5209@aol.com • Individual stocks - If, upon inspection, the above ETFs seem a little too risky and volatile for your taste, you may wish to consider formulating a portfolio of engineering, industrial and utilities companies composed of large-cap, blue-chip, dividend-paying stocks characterized by international exposure and a likelihood of participating in the effort to curb global warming. Conveniently, the folks over at Alt Energy Stocks (http://www.altenergystocks.com/archives/2007/11/our_blue_chip_alternative_energy_stock _list.html) have composed such a portfolio, some of which is shown in Table 1. While not all of these companies may appear on lists of “most eco-friendly”, they do stand to profit while working to help the environment. This portfolio has Canadian MoneySaver

PO Box 370, Bath, ON K0H 1G0

(613) 352-7448

• http://www.canadianmoneysaver.ca • JUNE 2008


!!

!!!!!!

"#$%&! !!!

Alternative Commodities Indices New Markets. New Solutions.

Ilija Murisic


Ilija Murisic - Alternative Asset Markets