Melis analyzes forecasts for areas from the snowcapped mountains of Norway to the beaches of Spain's Costa del Sol to predict changes in demand for power and gas. The founder of Energy Capital Management BV, which has raised $60 million and started trading in October, targets returns of 25 to 30 percent.
``If you don't know what the weather is doing you have no chance making money trading energy,'' Melis, 38, says in his ninth-floor office overlooking Amsterdam's biggest power plant.
The number of hedge funds with more than a quarter of their capital in European energy jumped fivefold to 50 last year as German utilities began releasing data on plant outages, helping traders forecast supply in the region's largest market, according to Energy Hedge Fund Center LLC. The value of derivatives traded on the European Energy Exchange in Germany more than doubled to 58.75 billion euros ($78.08 billion).
European power prices are on the rise after falling to records following the mildest winter in more than 100 years.
Germany's third-quarter power contract has been the focus of traders ever since April 11, when the U.K.'s Met Office said the summer in northwest Europe would probably be hotter than average, boosting demand for power and increasing the risk of price spikes.
The contract rose as high as 49.30 euros a megawatt hour on May 18, after dropping to 36.40 in February. It closed at 44.25 euros on June 14.
Price Controls
Government interference may threaten the development of European markets. Price controls in France, Spain and Italy deter investors, said Peter Styles, chairman of the European Federation of Energy Traders' electricity committee.
``At worst, price caps could not only distort the market but also destroy it,'' Styles said.
Traded power volume in France, Europe's second-biggest market, is about the same as consumption, compared with six times demand in Germany, said Peter Krembel, head of continental power trading at RWE AG's trading unit.
Hedge funds gained a toehold in Europe's power markets in 2001, when Norway's Interkraft Capital Management ASA began trading in the Nordic region. It was joined by U.S. firms D.E Shaw & Co., Tudor Investment Corp. and Amaranth Advisors Inc., which collapsed in September under $6.6 billion of energy-trading losses. D.E. Shaw and Tudor declined to comment for this article.
Hedge funds are mostly private and unregulated pools of capital where managers can buy or sell any assets, participating substantially in the profits of the money invested.
Investors are turning to Germany after generators began releasing aggregated power supply data last year. In addition, E.ON AG, the country's largest utility, now publishes planned outages. RWE AG, the second biggest, says it will do the same.
German Power
Germany's size and increasing liquidity may boost profits, said Daniel Dahlin, chief investment officer at Bermuda-based Electris Energy Fund Ltd., which has raised $25 million. Electris returned 7.3 percent in its first 12 months of trading on Nord Pool, Europe's biggest power exchange, and plans to expand into Germany this year.
``If you're active in more than one market you have the possibility of higher returns with a lower risk,'' said Dahlin, 36, the former head of Nordic power trading at Vattenfall AB, Sweden's state-owned utility.
Banks are also competing for a slice of the market. Citigroup Inc., the biggest U.S. bank, plans to add 10 traders for the European power and gas and carbon allowance markets.
``When you're looking to get established, it's important to hire key traders with experience that you can build a team around,'' said Paul Mead, Citigroup's managing director for power, gas and emissions in London.
Traders in Demand
Competition for experienced traders is driving up salaries.
Compensation for European power traders started rising about three years ago and top performers now receive $4 million to $5 million a year, recruiters said.
``Bonuses of 300 percent are not limited to the banking community any longer as we are seeing similar deals adopted by the energy companies,'' said Jakob Bloch, managing director of Hampshire, England-based Commodity Appointments Ltd.
Commodities hedge funds returned 13 percent to 23 percent last year, based on 100 funds tracked by London-based NewFinance Capital LLP. The Standard & Poor's Goldman Sachs Commodity Index of 24 futures prices fell 15 percent last year.
Melis's MMT Energy Fund seeks to profit on the difference between energy prices in various markets and time periods.
``We're doing well,'' he says, declining further comment on whether the fund is meeting its target for annual returns.
Amsterdam Garages
Melis got his start in the Amsterdam real estate market, where he's been buying and selling houses and garages since the mid-1990s. He developed his energy trading skills at BP Plc, Statkraft SF, Reliant Energy Inc. and Delta Energy NV.
That experience helps him oversee the MMT fund's positions in German, Dutch and Belgian power and U.K. and Dutch natural gas as well as European carbon allowances and coal contracts.
Melis and his four colleagues spend their days in an office decorated with maps of the European power and gas distribution networks, along with charts showing generation capacity and fuel sources used in countries throughout the region.
At a communal work table, weather reports and prices for energy contracts stream across banks of metal-edged, flat-panel screens. Melis plans to add French, Nordic and U.K. power, along with Brent crude and gasoil to the fund's portfolio this year.
``The nice thing about energy is that it's very complex, difficult to understand and very volatile,'' Melis said. ``That's what makes it interesting.''
Long, Hot Summer
Melis and energy trader Olaf Ter Bille make deals on the exchanges and in the over-the-counter markets, where brokers such as Icap Plc and GFI Group Inc. match buyers and sellers.
Over-the-counter trades still account for more than 75 percent of the volume in the seven biggest electricity markets, according to Prospex Research Ltd.
``Europe's power markets are beginning to mature, but are still relatively untapped by hedge fund traders and they are growing rapidly,'' said Gary Vasey, co-principal at Energy Hedge Fund Center in New York.
For now, traders are focusing on how the weather will affect prices in the next few months.
``Everyone's afraid of a hot summer,'' Melis says.
by Lars Paulsson
Nymex Is Exploring a Sale to NYSE, CME, People Say
Nymex Holdings Inc. may be valued at $155 a share or $14.3 billion, 11 percent more than yesterday's closing price, said one of the people, who asked not to be identified because the talks are confidential. Top Nymex executives have met with their counterparts at the three suitors, the people said. Nymex's board has been informed of the discussions.
The talks reflect efforts by exchanges worldwide to offer more products in one place, as hedge funds and investors participate across a range of markets. In April, NYSE Group Inc. bought Euronext NV for $14.6 billion and Frankfurt-based Deutsche Boerse agreed to buy New York-based International Securities Exchange for $2.8 billion.
``What this does is speak to how size is extremely important to being competitive,'' said Mark Williams, a finance professor at Boston University. ``The derivatives market in general has really exploded in part because trade is becoming more global.''
Walter Allwicher, a spokesman for Deutsche Boerse, said the company doesn't comment on speculation. Chicago Mercantile spokesman Allan Schoenberg declined to comment, as did Richard Adamonis of NYSE Euronext, based in New York.
Trading in derivatives, financial instruments whose value is based on changes in stocks, government debt, loans, currencies and commodities, has surged in recent years. In the first two months of the year, global futures and options trading increased 11 percent, with U.S. derivatives trading jumping 22 percent, compared with the same period in 2006, according to the Futures Industry Association, a trade group in Washington.
Chicago Merger
Bankers have not yet been hired to advise Nymex on the possible sale, the people said. The discussions are likely to accelerate after July 9, when shareholders of the Chicago Board of Trade vote on a proposed acquisition by the Chicago Mercantile Exchange, they said.
The Chicago Board of Trade has agreed to sell to its crosstown rival for $10.2 billion and has spurned an unsolicited $11.1 billion offer from Intercontinental Exchange Inc. In January, Atlanta-based Intercontinental, the biggest competitor to Nymex in the trading of benchmark oil and fuel contracts, completed a $1.8 billion purchase of the New York Board of Trade, which trades sugar and cocoa futures.
Shares Gain
Nymex shares have jumped 12 percent this week on speculation it is a takeover target. The June 11 decision by U.S. Justice Department antitrust regulators to allow the proposed merger of the Chicago Merc and Chicago Board of Trade helped boost Nymex shares, Williams said.
If the government doesn't object to combining the Chicago exchanges, which together control more than 95 percent of exchange- traded U.S. futures based on interest rates and stock indexes, it probably won't find fault with a sale of the Nymex, Williams said.
Shares of Nymex closed up $6.63 yesterday, or 5 percent, at $139.80 in New York Stock Exchange composite trading. They have more than doubled since Nymex Holdings first sold shares to the public in November.
Deutsche Boerse shares fell 32 cents, or 0.38 percent, to 84.81 euros as of 9:09 a.m. in Frankfurt. NYSE Euronext rose 8 cents, or 0.13 percent, to 60.55 euros in Paris.
Before its initial public offering, Nymex transformed itself from a member-owned organization and sold a 10 percent stake to buyout firm General Atlantic LLC of Greenwich, Connecticut. General Atlantic Chief Executive Officer William Ford serves on the boards of both the Nymex and NYSE Euronext. General Atlantic was the largest holder of Archipelago Holdings Inc., the electronic stock exchange that merged with the New York Stock Exchange to form NYSE Group last year.
NYSE's Interest
Nymex ``has a very good franchise in the strong and growing derivatives market,'' said Craig Pirrong, the director of energy markets for the University of Houston's Global Energy Management Institute. ``NYSE has made it very clear they want to expand into derivatives, so they make sense.''
NYSE Group's purchase of Paris-based Euronext created the first trans-Atlantic equity market and expanded the Big Board's reach into trading futures contracts in Europe for commodities and interest rates through its London-based Liffe market.
NYSE Euronext Chief Executive Officer John Thain said on June 6 that his company may buy a U.S. futures market while expanding its own options trading systems.
``It may be that NYSE feels like it's going to be punished if it doesn't do a deal, so they may be rather aggressive,'' Pirrong said.
Deutsche Boerse
Deutsche Boerse, operator of the Frankfurt stock exchange, is seeking to create the largest trans-Atlantic derivatives market with its plan to buy the International Securities Exchange, which is based in New York and trades options on individual stocks.
Nymex trades benchmark crude oil, natural gas and gold contracts on its floor in lower Manhattan and electronically on the Chicago Merc's Globex platform. Nymex agreed last year to list its contracts on Globex after Intercontinental took market share in its U.S. crude oil futures contract.
The lack of its own electronic platform is a chink in Nymex's armor, Pirrong said.
``Nymex is not viable for the long-term as a standalone business, partly because they don't own their own technology,'' he said. A positive for Nymex is that it has a clearinghouse that guarantees all the trades made on the exchange, he said.
by Matthew Leising
