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7th Annual Weather Risk Management Association Meeting Opportunities to Integrate Weather and Weathe

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Louisville, KY 40223 (502) 245-6220. GuaranteedWeather LLC. 8400 West 110th ... Weather drives price action in the energy markets from the demand and supply ... – PowerPoint PPT presentation

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Title: 7th Annual Weather Risk Management Association Meeting Opportunities to Integrate Weather and Weathe


1
7th 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
2
Parhelion 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.

3
Organizational 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.

4
Organizational 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.

6
Technical 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.

7
Weather 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

8
Process
  • 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

9
Process
  • 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.

10
Process
  • 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 .

11
Process-Price Impact of Weather
12
Process
  • 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

13
Process
  • 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.
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