From uranium to barges, hedge funds covet all

By Santosh Menon - Analysis

LONDON (Reuters) - Hedge funds may not be the obvious candidates to run electricity grids or barge fleets, but the race to generate ever greater returns is luring more of them to do just that.

Larger energy and commodities specialist funds are setting up so-called "special opportunities funds" to snap up infrastructure or positions in physical commodities markets.

"Wherever you look, the trend is to move into the physical side of the business," said Gary Vasey at energy and utility consultancy UtiliPoint.

Large Wall Street banks, private equity firms and now hedge funds are jostling to acquire physical assets, he said.

Ospraie Management, a U.S-based hedge fund, earlier this year bought into a barge company in the United States, hoping to ride an expected boom in the need to transport commodities across the U.S. on barges.

U.S. hedge fund groups Adit Capital and Solius Energy Fund are among hedge funds that are reported to control more than 25 percent of the world's physical uranium stockpiles, hoping to profit from revived interest in nuclear power.

From refineries to liquefied natural gas (LNG) import terminals, barges to ships and oil tankers and dry ports, nothing seems to be off limits for these financial players.

"Centaurus, Saracen Energy ... they were founded as hedge funds to trade energy. (But) if you poke under the covers, you will find they are in the physical side of the business," added Vasey.

MORE INSIGHT

Analysts and industry officials say hedge funds are finding that owning a physical asset allows them more insight into the market, giving them an extra trading edge as they come under increasing pressure from investors to boost returns.

"Generating alpha is becoming increasingly more difficult through the futures markets, as you have an influx of traders ... who are using similar trading strategies," says Amine Bouchentouf, President of Renaissance Investment Advisors, a New York-based financial advisory firm.

"You can generate alpha at a substantially more attractive level (from physical assets) because the barrier of entry is high. The returns are more interesting than the futures market," he added.

But investing in physical assets is not an option for all.

Sheer financial capability will make it a significant barrier for many of the smaller hedge funds, used only to handling tens of millions of dollars and running operations with barely a dozen employees.

"It's only an option for bigger funds," said one hedge fund manager, adding that hedge funds would need at least $300-$400 million to diversify into the physical world.