I am a commodity quant with applied mathematics background and I have been trading with ERCOT and PJM for more than a year through quantitative models and extensive understanding of the micro-structure and price formation (unlike pure data science approach). I work for a private equity. I have been a commodity quant for now over 5 year and I think it really took me 5 years to get it right just cause of nature of power market. Before that I was in equity algorithmic trading which is all about how sharp your AI model is. I want to launch on my own but I am having trouble finding investors or funds who would lend me capital to start on my own even though I am willing to sign a first loss clause. Back when I was in equity market, people worked with likes of Maverick Trading but I haven't found one in power market. Any ideas where and how to approach this ? Edit: I am not looking to join a hedge fund as they do only 20-30% split.
That's a tough ask for two reasons. First, it's a tiny niche and those outside that niche don't understand it well enough to be comfortable funding someone in it. Second, a good chunk of power trading firms went out of business back post-Enron and more recently many of the independent power producers have gone bankrupt, so there's a perception that it's a picking up nickles in front of steamrollers kind of business. If you're already in the industry and already working for a PE fund the path is to figure out who all the LPs are behind all the PE funds in the industry now and try to get funding there since then you're only trying to convince them that you're a good risk, not that both you and the industry are a good risk. If you're not comfortable doing this, maybe think through your network to find someone who is who may be interested in partnering. It's not easy, but then that's why some people work at PE funds and others run them!
Thank you for sharing your experience with the trading with PJM and ERCOT ISO that its an interesting platform after reading your article the new investors will be encouraged and they will be aware of risk and the rewards associated with the investors hence the article is quite informative.
No, they probably won't be able to wrap their heads around the possibility of 1,000 percent vol in the INC/DEC markets during Summer peak hours. There is nothing on planet earth more volatile than power. Low Natural Gas prices have driven down wholesale electricity prices the past few years, but at the same time utilities (especially in ERCOT) have been retiring base load generation. Reserve margins are getting a bit chippy. The challenge is that post-2008 the current landscape in HF's and Proprietary Trading Groups is that they tend to avoid risk for the most part. Another big hurdle is going to be the margin requirements that the ISO's and ClearPort / LCH (if you're doing those products) are going to require. It is substantial. ISO's have gotten burned in the past with spec accounts not making good on trades. Can you model congestion and trade FTR's ? That might be a better approach. Just spitballin' here. I wish you good fortune with your endeavors.
I do model short term congestion but not FTRs. Short term congestion trades have been very successful also. With all due respect to successful FTR traders, I feel FTR trades are fundamental trades and are hence binary in nature. All market participants use same information and same/similar tools. So, it is hard for me to accept that in a speculative environment one firm has statistical advantage consistently. Greenhat in PJM is the great example in this context. Their account was in profit for a very long time before turning deep red. FTRs are just the honey which attract low hanging non power investors IMO. Please feel free to express counter argument if you think my opinion is missing logic.