Title: 7th Annual Weather Risk Management Association Meeting Opportunities to Integrate Weather and Weathe
17th Annual Weather Risk Management Association
Meeting Opportunities to Integrate Weather and
Weather Sensitive Commodity Trading Neil Ramsey,
Chairman RQSINovember 9, 2005
RQSI 1515 Ormsby Station Court Louisville, KY
40223 (502) 245-6220
GuaranteedWeather LLC 8400 West 110th Street,
Suite 650 Overland Park, KS 66223 (913) 253-1210
2Parhelion Fund Opportunity
- The weather, energy and agricultural markets are
growing rapidly. - Weather drives price action in the energy markets
from the demand and supply sides and in the
agricultural markets from the supply side. - GWs best in class weather expertise integrated
with RQSIs technical commodity trading models
create a unique capability to integrate weather
and commodity trading. - Parhelion Fund was seeded with 15 million of
proprietary capital and represents a unique
integration of well established commodity futures
and the emerging but rapidly growing weather
market.
3Organizational Overview
- Parhelion Fund is co-managed by Guaranteed
Weather and RQSI, affiliated - companies each with a unique area of expertise.
- Ramsey Financial, Inc. (RFI) was formed in 1986
with a focus on managed futures. In 1996, RFI
formed RQSI, based in Louisville, KY, to focus
the firms efforts on the research, development,
and implementation of quantitative trading
strategies and related investments. - RQSI has evolved into a technology driven
multi-product asset management firm. - RQSIs mission is to develop trading strategies
that provide for stability of invested capital,
measurable volatility, and above average
long-term returns that are not correlated with
traditional market indices. - RQSI is a well-capitalized, fully staffed
investment management firm with approximately 1
Billion under management.
4Organizational Overview
- GW is a leader in the weather-derivatives market
and is ranked 1 in Asia and 2 in North America
and Europe1. - GW has a significant share of the global market
for weather risk management products. - The investment team is based in Kansas City and
has extensive experience in weather risk
management. - GW maintains a best-in-class trading and risk
management platform and multi-channel global
distribution network and partnerships. - GW is credit rated (SP BBB/stable/A-2), and is
the only independent market player to attain an
investment grade credit rating. - Parhelion is uniquely positioned to capture
returns in the expanding weather derivatives - and commodity trading markets through the
combined efforts of GW and RQSI.
1 Source Environmental Finance 2004 annual
survey rankings.
5 Potential Return Sources
- Sources of Return
- Parhelion is designed to have five sources of
return a proprietary technical trading platform
and four weather-based strategies. - The proprietary technical trading platform has
been constructed to produce a Sharpe ratio of 1.0
and expected annual return levels of 10-12 - The weather strategies are designed to increase
both the expected returns and the Sharpe ratio of
Parhelion over what the Fund could earn solely
through the technical trading platform.
6Technical Platform
- Technical Trading Platform
- A sophisticated long-term trend following system
with its core strength being a futures-centric
proprietary Markowitz portfolio optimization /
allocation scheme. - Paired with a volatility based system that is
breakout oriented, it attempts to initiate
trading positions at low risk entry positions
where the market has a higher probability of
establishing a medium to long term trend - The signal generator assumes that markets move in
cycles of increasing and decreasing volatility
(expanding and contracting ranges) - The model utilizes a trend estimator (which
statistically avoids the risks of excessively
extended markets) to determine signal strength. - The signal for each instrument is then passed
through the allocation algorithm which determines
position size using the covariance matrix of all
instruments. - The signal generator coupled with the portfolio
logic gives a very sound participation in
trending markets. - It is capable of protecting against the extreme
risks that may exist at the end of major trend
moves where all markets become aligned.
7Weather Trading Opportunities
- Weather Trading Strategies
- Parhelion utilizes four weather trading
strategies to add incremental value and mitigate
technical risk. - Modifications to the technical system based on GW
and third party weather forecasts and expected
effects on commodity markets. - Relative value/option structures where volatility
may be sold in the mean reverting and higher
margin weather market to buy volatility in the
more exponential commodity markets - Stand alone weather trades that can be either
complementary or serve as a hedge to the
technical system - Relative value/mmbtu strategies with a weather
component
8Process
- The Influence of Weather on Commodity Prices
- Weather impacts commodity prices across a
temporal continuum - Intraday/daily forecast shocks
- Weekly/multi-day gradients
- Parhelion views weather in the context of the
broader market/normalization - Market intelligence
- Fuel-to-fuel relationships (/MMBTU)
- GW provides expertise for value-added weather
trading - Timely dissemination/interpretation of new
forecast information (perception or meaningful
changes) for publicly available sources - Proprietary weather and climate modeling
- Relative value analytics of weather and its
impact on energy and agricultural strategies
9Process
- A key area of competitive strength for the GW
Parhelion Fund is our proprietary technology - Proprietary pricing and portfolio management
systems apply advanced atmospheric theory and
statistical analysis. - These systems are highly scalable into the
weather sensitive commodity markets. - Our comprehensive global weather database has
over 550 million global weather observations that
are cleaned and maintained on a real time basis
with proprietary data-scrubbing process covering
15,000 locations in 28 countries. - Out team measures correlations between commodity
prices and weather conditions and forecast
changes and has the ability to build time-scaled
automated technical trading models.
10Process
- Forecast Assimilation into Trading Space
- Forecast skill is directly applicable to weather
trading and has equated to a long-term
profitability stream. GW has always looked to
deploy capital in specific, targeted situations
where forecast dispersion/spread is large. - In commodity space, forecast accuracy is
secondary to perception. - The Parhelion team understands the perception
factor and grasp the key weather
factors/sensitivity points of the energy and
agriculture markets. This mindset has been
forged from extensive experience within the
commodity trading sector. - In addition to proprietary forecasting, GW can
predict third party provided forecasts to capture
the perception factor for determining the impact
of forecast shock, and adjust position sizes
accordingly .
11Process-Price Impact of Weather
12Process
- Weather Strategy Weather/Commodity Relative
Value - Because of market dynamics, the weather or
commodity markets may have higher risk
margins/returns at any particular point in time. - Weather market has mean reverting linear burn.
- Commodity market has non-linear exponential
burns. - Relative volatility strategies can be developed
to exploit anomalies in the weather and commodity
markets. - Weather Contract Trading
- Weather contracts can be attractive investment
opportunities on a stand alone basis - Due to market maturity, may have higher margins
- Forecast and actuarial skill
- May be complementary or hedge of commodity
positions
13Process
- Multiple Levels of Risk Management
- Managing risk is a key element of how we
construct a portfolio. The Parhelion Fund employs
multiple levels of risk management - The strategies are complementary to each other.
- Each strategy is built and managed as a
stand-alone program. - The weather trading strategies can complement as
well as hedge the technical strategies. - We implement a portfolio overlay strategy for
managing total portfolio risk.