04.18.2013
By Terry Flanagan

Fundamentally Driven

Centaurus Advisors was founded by John Arnold in 2002 and made a name for itself trading natural gas. By the time Arnold retired and disbanded the hedge fund in 2012, assets under management had increased to a reported $3 billion. Centaurus was known for being a big part of the ‘other side’ of the failed Amaranth Advisors position that led to that firm’s collapse in 2005.

Bill Perkins, formerly a Centaurus trader, hung out a shingle of his own last year and launched Skylar Capital Management, a Houston-based hedge fund that trades gas futures, options, and swaps. Skylar has increased its assets under management from $102 million about six months ago, though the firm declined to specify current AUM.

Markets Media interviewed Perkins via e-mail on April 4.

Markets Media: Please explain why you launched Skylar Capital Management.

Bill Perkins: When founder John Arnold decided to retire and wind down trading operations at Centaurus Energy last year, I considered various options. I had previously considered launching my own fund, but the timing was never right. We had a very successful 10-year history at Centaurus as fundamentally based traders. I believed, and I still believe, that the U.S. natural-gas market continues to offer numerous opportunities for fundamentally based traders. More specifically, I have an edge in this market given my particular approach to fundamentals. As long as I can generate good risk/reward, I will pursue it for myself and Skylar’s investors.

MM: Explain your investment strategy. What is your edge vis-a-vis other funds with similar strategies?

BP: Skylar’s trading strategy is fundamentally based. Our edge is rooted in our proven experience and the deep analytics and data gathering we do. Similar to the approach at Centaurus, we aggregate, clean, measure and analyze relevant fundamental data sets. We carefully follow specific trends and sub-trends in the market to understand what piece of information will be the marginal driver of price.

While our approach is not without risk, we aim to position ourselves to be able to trade through various market cycles. In our view, fundamentals will always win out.

MM: How has the fund fared so far, in its first six months of existence?

BP: We had a good launch and posted positive gains for our investors during the first six months of operations. We target a relatively high return target with a commensurate level of risk and volatility. While past performance is no guarantee of future results, thus far our investors are pleased with Skylar’s performance and buy into our brand of fundamentally based trading.

MM: How do currently low natural-gas prices affect your trading strategy? Are you expecting a secular upturn in prices?

BP: The absolute price level of natural gas is important but does not affect our strategy as much as overall price movement. The natural-gas market shifted from a period of destroying demand with high prices through the summer of 2008 to now inducing new demand with current lower prices. Over the years, natural gas has proven to be a commodity that quickly adapts to changing supply-demand fundamentals. High prices found a reaction in the market, just as lower prices have found.

It is hard to see a secular upturn in prices until the market can induce enough new demand to outpace the tremendous supply growth from shale gas. Exporting liquefied natural gas (LNG) may provide the impetus to increase demand, but we believe that is at least a few years out.

Bill Perkins

MM: What were the most important lessons learned in your 10 years at Centaurus?

BP: I learned two important lessons from my time at Centaurus. First, I learned a strong appreciation for the amount of work that has to go into analyzing the market correctly from a fundamental standpoint. Everyone has access to so much data now, but staying ahead of the pack in terms of gathering new data and analyzing existing data in new ways demands a great deal of effort. I also learned that one has to respect the amount of capital that can pour into single-sector markets similar to natural-gas futures. Demand for futures contracts is a fundamental factor that has to be taken into consideration alongside all the physical aspects of the natural-gas market.

MM: What have been the most significant changes in the hedge-fund space over the past decade?

BP: The amount of capital allocated to fundamental traders similar to Skylar appears to be shrinking. At the same time, the amount of capital allocated to long-only index funds and to other global-macro funds appears to be growing. For natural gas, this means capital flows can overwhelm market fundamentals and natural-gas specialists such as Skylar have to respect the amount of money looking for returns in our space.

MM: How would you characterize the current capital-raising climate for hedge funds?

BP: The market still has a hangover from the global financial crisis. It does not help that certain Commodity Trading Advisors (CTAs), trend followers in particular, have not posted good returns in the past two years. Both of those factors have made it a challenging environment to raise capital.

That said, we were able to launch with a respectable level of assets under management and have been able to raise assets almost every month since inception. It also helps to have a strong track record and deep experience at one of the most successful energy funds in history.

MM: How frequently do you trade/turn over positions? How is liquidity in the market(s) you trade in?

BP: Our positions tend to be seasonal, therefore turnover is relatively small. We participate in the market daily but we don’t tend to change direction on a week-to-week basis. As fundamental traders, sometimes it takes a few weeks or months for price to shift as our analytics tell us they should.

MM: What market-structure or regulatory issues are meaningful for Skylar?

BP: The amount of new regulations impacting our space has had a significant impact. Exchange limits are one example. In the name of greater transparency, market regulations have tended to overreach and limit the risk a fundamentally based trader can warehouse. Other regulations including Dodd-Frank and the Volcker rule have tended to cause banks in particular to exit or reduce their presence, which has hurt liquidity.

MM: Discuss your approach to risk management.

BP: We are a discretionary, fundamentally based fund so our risk-management approach gives us enough room to maneuver within the relatively high volatility in natural gas. That said, we manage our portfolio and risk according to our target return. We keep daily P&L swings within certain parameters commensurate with those same annual target returns. We also have internal thresholds to take risk-mitigating actions under specific circumstances.

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