Chapter 4Trading and Investing in Energy Commodities

Successful investing is anticipating the anticipations of others.

John Maynard Keynes

Our previous chapter identified the complexity and volatility of energy commodities as a substantial source of their attractiveness as an investment class. In a nutshell, the complexity and price volatility of energy commodities are tied directly to the physical characteristics of the commodities themselves. In particular, the physical characteristics involved in energy production and logistics are particularly important in understanding the trading dynamics of these commodities.

In order to better understand investing in energy commodities and energy commodity hedge funds, we take a slight detour to emphasize a crucial point. From an activity-based point of view, we separate a hedge fund into two components with distinctly different functions.

The first is the trading operation, which includes all those tasks that are directly related to the trading of the portfolio (i.e., portfolio management) and investment strategy design, trading strategy, market research, market analysis, and execution of trades. In this book, the trading operation will be interchangeably referred to as portfolio management, the fund, or fund management as they are often used interchangeably in the vernacular and popular press. That said, it is important to remember that legally, portfolio management activities are handled by the investment manager (or delegated to ...

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