Welcome
Buyer Community> Trade Intelligence> Financial Markets> INTERVIEW-Oil-focused Asian hedge fund starts trading distillates
Source: Reuters

INTERVIEW-Oil-focused Asian hedge fund starts trading distillates

Published: 02 Dec 2010 04:20:34 PST

* Ex-jet fuel trader starts oil-focused hedge fund in Asia

* Fund focuses on distillates market, 70 pct on regrade

* Takes short view of jet market

SINGAPORE, Dec 2 - RedWell Fund SPC, one of Asia's pioneering oil-focused hedge funds, has its eyes trained on the growing distillates market, as it started trading in Singapore's Over-The-Counter (OTC) swaps market, its founder said on Thursday.

The fund, with $13 million under management, is committing up to 70 percent of its portfolio to trading the regrade -- the price spread between jet fuel and gas oil -- and the rest to fixed-priced contracts of both products, said Wei Min, who is also the fund's president.

Wei had been a distillates trader for 10 years, including as the book leader in jet fuel trading for Chinese energy major PetroChina .

His customers, mainly institutional and individual investors in Hong Kong and China, have committed to raise their investment to $30 million when its targets are met, he added.

The fund, which has two traders among its nine staff, is expected to yield a return of more than 30 percent by the middle of next year, Wei said.

Asia-based RedWell joins the ranks of hedge funds set up worldwide with a focus on the oil markets, including London-based Mandara Capital that was set up by former bank traders, and Bluegold, which is already active in trading European swaps.

Wei said the fund has traded some 2 million barrels of regrade, mostly forward quarterly contracts, in the past week when it kicked off its business, taking a short position in the market.

REGRADE SEEN IDEAL FOR REDWELL

"The regrade is the ideal contract for us to start with, in terms of its risk-reward potential," he said.

"It is less volatile and has lower risk, compared with the flat-priced gas oil and jet contracts, but yield higher returns than the timespreads for both products."

In the past three years, the regrade has ranged from minus $1.00 a barrel to $5.00, yielding sufficient rewards with the right medium -to- long-term bets, and daily fluctuations have average around 10 cents. This is keeping the risk element low on a daily basis, Wei said.

In contrast, fixed-priced gas oil or jet fuel can move by $2.00-$3.00 a barrel in a day, while the products' timespreads have ranged between a contango of $1.20 to backwardation of around 30 cents. A contago indicates a weak prompt market while backwardation shows the strength of the front month.

The prompt December contract had peaked at a 10-month high of $1.60 a barrel last Friday and has held above 80 cents since Oct. 1, lifted mainly by seasonal factors especially during a harsh winter, as is seen in Europe.

"I believe that the regrade will soften at end-Q1/early-Q2 when the winter ends because supply in East Asia exceeds demand," he said, adding that there are about 40 cargoes of physical supply per month versus 25-30 cargoes of demand.

"While demand growth in China has averaged around 12 percent over the past few years, I do not expect imports to be as robust next year due to an increase in domestic production as new refineries come online and a switch to high-speed railway for domestic travel."

Wei said he will also look at trading in crude futures soon, mainly the U.S. West Texas Intermediate (WTI) and London Brent contracts, mainly as a hedge to his distillates trades in the event of low liquidity in the market.

Hedge funds are known for taking risky directional bets in oil markets.

Since the start of the 2008 financial crisis, many star commodity traders have moved to smaller commodities trading ventures, attracted by the prospects of higher salaries, greater autonomy and less scrutiny from regulators. [ID:nN15504574]

For example, the founders of Sempra, one of the most successful commodity firms of the last 20 years, launched a new private-equity backed company, Freepoint Commodities, soon after its sale to JPMorgan .

Another group, formerly form Credit Suisse , left the bank to set up a hedge fund backed by the private-equity Blackstone Group.

Related Article
Most Popular