Natural gas was the biggest gainer among commodities last year but the hedge fund that has historically led gains in the space had its first losing year, and many others were down double-digits after being on the wrong side of the market.
U.S. gas prices gained more than 26 percent in 2013, the largest rally in eight years as brutally cold weather boosted gas demand. Prices rose, and toward the end of the year, the market saw wild swings in the spread between the March and April gas contracts.
Investors suspect that natural gas hedge funds lost heavily on spread trades of the March and April contracts, after miscalculating winter and spring gas demand and price action.
Prominent funds, from the $1 billion Velite Benchmark Capital in Houston to the smaller Sasco Energy Partners in Connecticut, finished the year down about 20 percent or more, according to industry sources and performance data obtained by Reuters.
"It was a tough year without doubt for most of us. The losses were pretty broad-based," said Kyle Cooper, managing director of research at Cypress Energy Capital Management in Houston, a small $20 million hedge fund that lost 17 percent.
Hedge funds typically do not reveal their book, so it was hard to ascertain the price bets or size of the positions laid out by the gas funds, and the trades where they lost money.
It is also unclear how funds have fared in the first weeks of this year as natural gas futures prices have surged 20 percent so far this month.
Velite ended down 25 percent, according to two sources familiar with its numbers. It was the fund's first loss since its launch in 2006, and was also the most high-profile loss among gas funds. Velite was founded by natural gas trader David Coolidge, 49, who became the top natural gas fund manager after ex-Enron wunderkind John Arnold retired two years ago.
Velite declined comment.
Big price swings are not unusual in natural gas, but the fluctuating March-April spread caught even the most experienced traders by surprise. The spread, known as the "widowmaker" for sharp losses it has caused in the past, gyrated wildly in a 20-cent range in December as forecasters predicted milder temperatures and then arctic-like chills.
In December, the gap between March and April 2014 gas moved from 4 cents on December 4 to 19 cents on December 12, as funds expected inventories to drain by the end of the winter heating season as Arctic chills swept across the United States.
It then contracted to as low as 9 cents five days later only to blow out to 30 cents on December 23, leaving ample room for winners and losers.
This year, the market has continued to surge, with front-month gas futures hitting above $5 per million British thermal units on Friday, a peak since June 2011, after some of the coldest temperatures in two decades. Next-day gas prices in New York City rose to a record above $100 per mmBtu on Tuesday.
"We're still having incredible volatility now," Cooper said. "This means we could have more big losses in January, and possibly some big winners if they got it right." He declined to say how Cypress had performed for the month so far.
Of last year's losers, Fairfield, Connecticut-based Sasco reported a 20-percent slide on a capital of $244 million, performance data obtained by Reuters showed.
Houston-based Skylar Capital, which opened with about $100 million at the end of 2012 and is run by former Arnold protégé Bill Perkins, lost about 25 percent, industry sources said.
Copperwood, also in Houston and run by ex-Enron veteran Greg Whalley, declined about 27 percent on a capital of $800 million, two market sources said.
All the funds declined comment.
Compared to them and Velite, the average commodity-energy fund on Chicago's Hedge Fund Research rose 1.2 percent in 2013.
WRATH OF THE WIDOWMAKER
While the widowmaker was the likely cause of pain for some funds, others prospered by avoiding it.
e360 Power, an energy fund in Austin, Texas, which also trades electrical power, profited on its gas positions by focusing on market fundamentals and "trading around the ranges and the opportunities that were presented," said James Shrewsbury, principal at the firm. The fund, which manages $170 million, rose 47 percent on the year.
The widowmaker attracts mainly fund managers, said Julian Rundle, chief investment officer at Dorset Asset Management, which allocates money to commodity managers.
Once a fund began losing money on the trade, it was hard for it to unwind without further losses, Rundle said.
"The key point was you had to really pay up to get out of that thing."
(Editing by Josephine Mason and David Gregorio)