Due Diligence for Hedge Funds

Our hedge fund clients often have to go through due diligence with new investors, who ask about the risk controls (and systems!) they have in place.

Risk control goes beyond just software, and there are excellent risk control frameworks that consultants like Deloitte, Accenture, and Slalom Consulting provide. A lot of ink has been spilled on the two primary sources of information that must flow into a risk management system. These two sources, trades and market data, are required to perform risk management reporting such as exposure reports, VaR, etc.

Our view comes from how easy software controls can help you quickly get started. These are the salient points from our experience. Notably:

  • Trades: Traditional ETRM software defaults to allowing traders to enter the deals they've already made, into the software. The standard approach should be to have a system download the trades directly from the exchange (like NYMEX, ICE, NASDAQ, EEX). The idea is that no human ever touches the trade before it hits results.

  • Market Data: Market data should also arrive with as little human involvement as possible. Then the system can mark untouched deals against untouched data, and generate up to the minute exposure, VaR, and other reports.

  • FCM/Member Statements: Comparing system-generated positions and P&L, against bank statements can also be a helpful control; confirming that the reports sent to investors match positions and cash at the bank.

There is much more operational, process, and organizational control that can be built around this, of course -- but not letting people fat finger or manipulate data goes a long way. And it's easy.


It is Friday and I am grateful to be working - how else can I look forward to happy hour?!?

Without question, the shale oil and gas revolution is behind the dramatic fall in our gasoline and electricity prices, which has dominoed positivity to other industries, i.e. manufacturing. The U.S. Depart of Labor website shows a steady increase in manufacturing jobs from Nov. 2014 to present.

Contrary to what you might hear on the news, this turnaround has very little to do with politics – government programs and subsidies, but rather lower power costs. The U.S. now has the lowest electricity prices of any of our major industrial competitors, with the exception of South Korea.

This means we rely less on coal; natural gas is cheaper AND cleaner - the U.S. has reduced its carbon emissions more than any other nation over an eight-year period ending in 2013.

In our last blog, we discussed how Google headquarters would soon be moving to wind power. Perhaps they should have talked to the Germans, who recently announced that the high cost of renewable energy in-country was driving many of their native businesses to the U.S.

What does this mean at Molecule? A) We make an awesome product that directly propels the natural gas revolution, B) You can always trade renewable credits (which we also support), C) We’re not German and we’re okay with that - even though we admire their beer drinking!

The Wind Beneath The Interwebs

Last month, Google announced that its headquarters in Mountain View, CA would soon be run completely on wind power. That power will be purchased from a wind farm located between the San Francisco Bay Area and the California’s Central Valley. NextEra Energy owns said farm and, unlike most power companies that require you sign up for a minimum one-year contract, NextEra has locked Google into a whooping 20-year power purchase agreement. That would be enough Amex points to buy a Telsa!

The announcement comes on the heels of Apple’s recent admission that it spent $850 million to power its Cupertino headquarters and all California Apple stores, via a 280-megawatt solar farm in Monterey County. (Apple’s pocket change is also being used to help build the farm.)

Yo, friendly wind power, Topo Chico in the fridge, plus nap rooms, what’s not to love about Google?

“Quite frankly, we’re doing this because it’s right to do, but you may also be interested to know that it’s good financially to do it,” Cook told the crowd at a Goldman Sachs conference. “We expect to have a very significant savings because we have a fixed price for the renewable energy, and there’s quite a difference between that price and the price of brown energy."

Jackpot. Assuming NextEra doesn’t go under, what we wouldn’t give to lock-in our rate for 20 years in the Texas heat!

Sam Arons, a Google energy strategist, also told the Mercury News, "Not only do we think renewable energy is important from a climate change perspective, it also makes business sense," he said. The article added, "The buy helps protect Google from higher energy prices in the future, Arons said."

We’ll leave you with a parting question - Where is natural gas in this equation? It’s the obvious choice financially, cheaper than both solar and wind. And hey, we know a company that can help you out with getting the best prices.

Great Scott Marty, it's 2008!

Was I the only one cheering at the pump this week when the price to fill my tank crept up a few bucks?

Take these points produced in a recent Seeking Alpha post into consideration:

  1. Production is cut across the board
  2. Rig count down (you’ve sunk my battleship!)
  3. Prices begin to inch up, before production fully rebounds

We are all waiting for #3. Looking backwards to 2008, it took a full year for prices to hit their bottom, and they hit it twice, just to make sure we were listening. From this glut, prices rose 100% in just three months.

Alpha’s prediction is that prices will show strength before production drops or rig counts increase – contrary to what is generally thought. Just this week, we are starting to see pricing strength. Is that speculation of a supply correction?

We don't know. But, while things may seem scary, we’ve been here before and we know how this ends.

We’ll leave the short term trading moves to those of you who don’t build software for a living, but any cash we’ve got sitting under the floorboards in the office we are going long crude!

Floating Saudi Oil: A Short-Term Game

There has been a lot of questions being asked with oil prices falling. What is the reason? Is it short or long term? Is it supply- or demand-driven, or both?

One thing that seems clear is that the Saudis are taking a position of letting supply and demand takes its course. This has to be a short-term strategy. Even if US shale producers go out of business because $55 oil doesn't make sense for them today, you have to figure that technology will eventually catch up. Unconventional production will become economical at $55, and, well, now the Saudis are stuck with a price cap of $55 long-term. So, all this approach is buying, is perhaps a few years.

Market movements like these aren't one-dimensional. But for middle east producers, this looks increasingly like a short-term play. It looks like that their stance is good for them in the short run, but in the long run they still have to face up to the reality of shale. Not just in the US -- but globally.