Hedge funds have flocked to the power sector, attracted by continuing volatile electricity and natural gas prices. They are offering big signing bonuses, hefty profit-sharing contracts, chauffeured company cars and other incentives to lure traders from utilities, banks and rival investment firms.
“We’re in the spotlight more today than we’ve ever been in the past,” said Juan Penelas, co-founder of e360 Power, a Texas hedge fund firm that specializes in power trading and has seen assets under management nearly double since the start of 2022 to about $470 million.
The power sector is the busiest at HC Group, a London-based recruiting firm that specializes in commodities. Over the past year, the firm has helped finance companies make more power-related hires than oil-related hires, a firm executive said.
The boom is driven by two trends: the rise of energy-intensive artificial intelligence and the growing electrification of the energy transition. The International Energy Agency predicts that AI energy use will increase tenfold over the next two years.
According to McKinsey research data, global electricity futures trading volume is set to grow by 35% between 2019 and 2023. Some regions will see even bigger increases, with trading volumes surging 14-fold in the Nordics and three-fold in the UK.
The deal has attracted attention from some of the world’s largest hedge funds, including some of the world’s largest multi-manager investment firms, which use specialized teams to spread their bets across different markets, according to people familiar with the matter.
Citadel, which manages $63 billion in assets, was an early mover and has expanded its team recently. Millennium Management and Balyasny Asset Management have also been adding desks, bringing in traders and analysts from a range of market players, including utilities.
Bobby Jain, a former co-chief investment officer at Millennium, started a hedge fund firm this month after securing $5.3 billion in investment commitments. Jain Global is hiring more than a dozen portfolio managers for commodities, a key asset class, where power and gas will be an initial focus, according to people familiar with the matter.
Electricity is one of the most volatile commodities. To get an idea of how volatile it can be, consider the price of Brent crude, the global benchmark for crude oil. Over the past 12 months, electricity prices have traded between roughly $73 and $95 per barrel. But according to McKinsey, if it traded the same as electricity, the price could have fluctuated between negative and $850 per barrel.
The volatility and complexity of electricity markets present trading opportunities and risks. Over the years, various companies, including JPMorgan and Electricite de France, have run into trouble trading electricity, partly because of which Enron collapsed. Bets in the wrong direction can result in quick and huge losses, and regulators are scrambling to prevent sharp increases in energy bills for homes and businesses.
Over the years, the balance of power in the market has shifted and the role of investment banking has diminished.
More than a decade ago, many big banks including Barclays and Deutsche Bank ran trading desks buying and selling energy, but increased regulatory scrutiny and capital requirements led many to scale back their presence in the market.
“A lot of banks can’t afford to be in this business anymore. It’s a low bar for hedge funds,” said Anthony Gordon, former head of energy at Och Ziff Capital Management and now a partner at Avio Capital, a private equity firm that invests in energy infrastructure.
Compared with the highly regulated banking and utility industries, hedge funds are attractive to traders because they are sometimes less regulated and offer higher compensation. Top power traders typically take home 12% to 30% of their fund’s profits, according to headhunters and traders, roughly the same level of profit sharing that big hedge fund firms broadly pay to portfolio managers.
Companies are also tapping into talent from industry insiders.
Alex Watson, a natural-gas trader at French utility EDF, made billions when Russian supply disruptions caused natural-gas prices to soar. Mr. Watson made millions for the utility by betting on price differentials between Europe and the U.K., according to people familiar with the industry. Mr. Watson was hired last year by BlueCrest Capital Management, a private investment firm founded by billionaire Mike Pratt.
HC Group executives say portfolio managers can make tens or even hundreds of millions of dollars in profits in a good year.
Freepoint Commodities, a Connecticut-based hedge fund focused on energy, is offering some new portfolio managers 50% of the profits they make in their first year, according to a person familiar with the matter, who added that the firm’s power team is larger than any of its other commodities teams.
Top traders are also offered perks such as millions of dollars in signing bonuses and chauffeur-driven company cars to join the funds, according to headhunters and traders. Once they’re in, they’re given a challenge: to earn as much as they did before, something that rival traders and executives at commodity-trading firms say may be impossible.
“Power and gas markets crashed in 2022 and 2023 because of the aggression in Ukraine. If you were on the right side of the trade you made crazy profits, almost by chance. Some people made 100 times the normal amount,” said an executive at commodity trading firm Vitol. “This year, at least for now, the markets have calmed down. It will be nearly impossible to make the same amount of profit unless something extraordinary happens.”
While Russia’s invasion of Ukraine caused an unusual disruption, many market participants believe the combination of surging energy demand, decades-old power grid infrastructure and the continued adoption of clean energy could mean further outliers, or at least more extreme fluctuations.
More than 1,200 coal-fired power plants have been closed in the United States and Europe since 2000, according to Global Energy Monitor. Because coal is a reliable, albeit polluting, source of energy, the closures have left power systems more vulnerable to extreme weather events. The Group of Seven (G7) has committed to shutting down all coal-fired power plants by 2035.
One common strategy is to buy electricity cheaply in the early morning when demand is low, and then sell it during peak demand times, such as late afternoon. In areas with abundant renewable energy, prices can fluctuate rapidly due to changes in weather. Unexpected storms during the day can reduce the energy produced by solar power plants, causing prices to rise.
Write to Anna Hirtenstein at anna.hirtenstein@wsj.com and Caitlin McCabe at caitlin.mccabe@wsj.com.
