Hedge fund managers, traders and analysts are keeping a close eye on the weather — and not just to get an idea of what the weekend will be like.
Hedge fund managers, traders and analysts are keeping a close eye on the weather — and not just to get an idea of what the weekend will be like.
In the never-ending quest to get a leg up on their competitors, more professional money managers are looking to exploit weather fluctuations. Once a tool used by utilities companies trying to get a handle on geographic demand, private weather forecasts are increasingly being used by financial services companies.
“There's a thirst for this re-search,” said Michael Ferrari, vice president of applied technology at Weather Trends International in Bethlehem, Pa. “We look beyond the short-term volatility and think six months ahead of time so that our clients can make a play.”
About 20 financial services firms subscribe to Weather Trends International's services, including Citigroup Inc. and Merrill Lynch & Co. Inc., both of New York. The firm is courting hedge fund companies, Mr. Ferrari said.
Of course, not everyone is convinced of the usefulness of private weather forecasts.
“I'm skeptical of using weather forecasts,” said S. Nick Massey, a certified financial planner and regional vice president with Householder Group in Edmond, Okla.
“Some people thought we'd have a severe hurricane season this year, and we haven't,” he said. “You just don't know what will happen.”
Critics also contend that a drought in the mid-Atlantic region or a warm holiday shopping season matter little when it comes to navigating the next 20 years of a client's retirement.
“I don't really recommend commodities for individual investors, because it's speculation rather than investment,” said Adam S. Bold, founder and chief investment officer of The Mutual Fund Store LLC in Overland Park, Kan. “You can have a burst of weather that might make a stock go up or down for a short period of time, but that's for people who are traders and speculators, not investors.”
Cost and the amount of time it takes to manage the information also call into question the usefulness of private weather forecasts for financial advisers.
“It's more of an investment strategy that has to be actively managed,” said Gregory A. Zandlo, a certified financial planner at North East Asset Management Inc. in Coon Rapids, Minn. “I don't think people have enough capital to really get quite exotic in their selection, and for your normal adviser, it's one more thing you don't need.”
That said, at least one adviser reported putting his firm's dollars toward weather forecasting.
“Our firm uses [weather forecasting] extensively, and we pay a lot of money for it,” said Stuart N. Speer, a CFP and securities principal at Heritage Advisers LLC in Overland Park. “Our biggest transaction is green futures — wheat — and the flow of funds around correct forecasts is in the hundreds of millions.”
The firm has budgeted about $120,000 for weather research, which includes private data, as well as information from the National Weather Service. It has three clients who are big investors in wheat futures, Mr. Speer said.
So far, the weather analysis has given him a 70% success rate, and though it has proven useful to his clients, he said, the market for the data is very select.
“The risk is considerable to our investors, so it justifies the expense,” Mr. Speer said. “But it's like holding JELL-O on a wall; the hedge funds have more money and might think themselves smart when they've only been fortunate.”
Aside from just looking at the way a chilly winter or an oncoming hurricane will affect fuel prices, private weather forecasts can help professional money managers predict seasonal demand at certain companies. For commodities traders, the reports help predict whether drought or heavy rain are likely to wipe out crops — and profits.
“My 90-day forecast [from the National Weather Service's Climate Prediction Center] shows warm weather ahead,” said Matt McCall, president of Penn Financial Group LLC in Royersford, Pa. “It doesn't bode well for natural gas, but it may be good for retail.”
But Mr. McCall, who manages a pair of exchange traded fund portfolios, noted that the weather reports are just a small part of the research that goes into his data.
“It's only part of our research,” he said. “We don't use pure fundamentals or pure macroanalysis.”
Darla Mercado can be reached at dmercado@crain.com.
