Quantifying And Modelling The Optionality Of Energy Assets

The dramatic drop in energy prices since 2014, and the largely abysmal returns faced by a record number of commodity-focused hedge funds in 2015¹ (net returns for commodity hedge funds were -7.24% in 2015), led to a lot of energy firms being under capitalized at best, and insolvent at worst. Financing pressure on commodity trading companies have attracted hedge fund, private equity funds investors who are chasing for well priced energy assets. This transpired in conjunction with a lot of Investment Banks exiting the commodities sector, given high regulatory capital requirements and regulatory restrictions on physical trading.

Potential and new investors in the space, especially those without a commodity portfolio management background often face the difficult task of valuing the real option aspect of energy assets, and most importantly optimizing and monetizing their flexibility.