Even after two decades of surfing the tumultuous natural gas market, Todd Esse found the transition from hotshot merchant trader to hedge fund manager a humbling experience.
So far this year, Esse's $625-million Sasco Energy Partners fund in Westport, Connecticut, is up 10 percent. It is a rare double-digit gain in one of the industry's most challenging years, marked by the retirement of billionaire gas trader John Arnold and the fall of several other commodity trading stars.
Esse's run hasn't come without stumbles. He lost money twice this year, in February and in May, when the market surprised him by rebounding - often swiftly - from a 10-year low.
But compared with some energy fund giants, Sasco's losses were small, the result, he says, of learning some hard lessons about risk in the early days of the fund, which opened on June 2008, before the worst financial crisis in generations.
Sasco fought to a 3 percent gain in 2008, only to risk losing it all the following September as natural gas prices kicked out of a long tailspin. The fund fell 13 percent that month.
"We had a lot of volatility in the first year. My challenge was trying to understand how to move from being a proprietary trader on a desk to a portfolio manager at a hedge fund," Esse said in the first media interview of his 23-year career.
While investors did not desert him because of September 2009, Esse also found that in his new environment, he did not have months to restore profits. Unlike his days working for Enron and Sempra - two of the most renowned energy merchants, with large infrastructure and customers to help backstop their trading - hedge fund investors like upbeat results on a regular basis.
"Previously, I got paid at the end of the year. As long as at the end of the year it worked out, it was great. Today, I'm really focused on every month," he said.
Last year, Sasco, named for the street Esse lives on, was the second best-performing gas fund in the United States, gaining 25 percent as Esse's bearish bet on gas paid off.
This year, through May, two other gas-focused funds, both in Houston, are leading Sasco - Velite, which is up 25 percent and Sandridge, up 22 percent.
But the average energy fund tracked by New York's eVestment Alliance is down nearly 4 percent, against Sasco's 10 percent gain, putting Esse in the ranks of the industry's best.
Still, the 45-year-old father of six - who grows his own vegetables and spends his free time teaching neighborhood kids how to make honey from the bee hives in his garden - prefers to think himself as more lucky than smart.
"If you look at gas prices, we've had these bursts and blowouts over the last two decades. I was fortunate enough to have been sitting in the right spot when some of that happened."
Considered the world's most volatile commodity for most of the past decade, natural gas has seen an unyielding surge in cheap U.S. shale output that has squelched prices and volatility - until this year.
In the first quarter, record high inventories and the warmest winter on record drove prices to a 10-year low of $1.90 per million British thermal units. But then cheap gas prompted demand from utilities opting to switch away from pricier coal for power generation, helping the market bounce nearly 45 percent from April's lows.
As traders struggle to pinpoint an equilibrium price, the market is kicking again. Prices surged 14 percent on June 14, the biggest one day-gain in three years.
Esse and his team of three traders took a 4 percent loss in February when gas edged up. The loss prompted cut Sasco to cut risk to its lowest level in 20 months.
He ramped up positions in time to catch the March downdraft and late April rebound, but like many of his peers misread May - a month when Europe's festering debt crisis and global economic uncertainties roiled energy markets, including oil.
"A 25 percent rally in natural gas from end-April through May 18 was more than we expected, only to be followed by significant weakness for the remainder of the month. That type of price action makes for a tricky market."
Sasco lost 3 percent in May. The average energy hedge fund fell more than 7 percent, according to data from eVestment Alliance.
Esse's fund also did better in May than some of its more illustrious peers in the energy space.
Astenbeck, the $3 billion Connecticut fund of oil market legend Andrew Hall, lost 14 percent. Hall calls May his "mensis horribilis" - Latin for horrible month - and is trying to prevent a second year of losses.
Others were less fortunate, with a few major commodity funds closing this year after months of sluggish performance. They include Arnold's $4 billion Centaurus gas fund in Houston and the $1 billion BlueGold and Fortress commodity funds in London.
It's Esse's background in trading physical markets that gives many investors confidence in Sasco.
"In the energy trading arena, we've always favored people with a merchant background, who understand physical trading and relative value. Todd's that kind of a guy," said Jerry Pascucci, Head of Alternative Investments at UBS Wealth Management Americas in New York UBSN.VX.
Pascucci provided early funding to Sasco when he was chief investment officer at Citigroup's Hedge Fund Management Group. He is considering allocating to Sasco in a new initiative.
A Texan by birth, Esse graduated with a business degree from the state's Southwestern University and "lucked out" by joining pipeline operator Panhandle Trading in 1989. He marketed and moved gas from the Gulf coast to the Northeast and Midwest, learning how to price the commodity.
He joined Enron in 1992, and was given the chance to run his own gas trading book for the Rockies and Pacific Northwest regions. He was also asked to join a centralized risk group at the utility as Enron made a push toward big time energy trading.
"That kind of cultivated my trading style," Esse said.
Within a few years, he left to run the gas unit at the energy trading division of American Insurance Group (AIG.N) - later bought by California power firm Sempra - and made his mark.
Michael Doyle, a former broker at AIG who now heads Spartan Commodity Partners in New York, remembers gas futures breaching $3 per mmBtu for the first time in 1995 and Esse - who joined AIG a year earlier - riding the rally to above $4.
"He was probably the first guy at AIG who made real money in natural gas," recalls Doyle. "His timing was really great."
The revenue AIG earned from the gas trading operations headed by Esse formed a part of the $225 million price that Sempra paid in 1997, people familiar with the deal said.
Esse stayed with Sempra for another 10 years, moving from Connecticut to London at point to set up the company's European operations before returning to the United States to start Sempra's liquefied natural gas business.
HIS OWN WAY
But like many of the senior players at Sempra, he left after the Royal Bank of Scotland (RBS.L) acquired half of the company in 2008. (Still more have departed since RBS sold its stake in Sempra to J.P. Morgan (JPM.N) in 2010.)
A chance encounter at a Christmas party in Connecticut opened the next avenue.
Tom Purdy, a former Morgan Stanley executive, convinced Esse to strike out on his own. They raised $11 million, and six months later, Sasco emerged.
Over the past four years, the fund has returned a total of 70 percent. The S&P GSCI Energy Total Return Index .SPGSENTR has dropped more than 50 percent over the same period.
"I've had fun and I've had bad times, but I'm really happy I made this move," Esse said. "I've kind of grown up in the process, become an adult."
(Additional reporting by Joseph Silha; Editing by Jonathan Leff and Bernadette Baum)