From the October 2013 issue of Futures Magazine • Subscribe!

Protec: Hedging and speculating, a winning team

Protec Energy Partners has produced solid risk-adjusted returns over its three-year track record, probably because principals Todd Garner and Andrew Greenberg have been working together for 14 years and both have worked in the energy field for more than 30. Their backstory is not unique, though energy trading is a twist. They run successful hedging firm Protec Fuel Management, which helps small- to  mid-sized companies with energy and fuel risk management strategies. In 2009, one of their customers, recognizing their trading acumen, asked them to manage his personal money and the commodity trading advisor (CTA) was born. 

“We had a great first year and more people started to come in,” Garner says. “[After] a good second year, it started to [really] grow. We went from $2.5 million [assets under management] to $85 million in less than a year and a half.”

Protec has produced a compound annual return of 40.11% with a worst drawdown of 14.43% since its April 2010 launch and is up 17.2% year-to-date through August.

“The edge is that we are very in tune with the physical market,” Garner says. “All of our strategies come from our day-to- day knowledge of that physical market.”

Garner and Greenberg had crossed paths many times working in the energy field. Greenberg would execute trades for Garner back when he traded on the New York Mercantile Exchange. 

In the 1990s, Garner held positions as director of trading natural gas, refined products and risk management for the Williams Companies. By that time Greenberg had left the floor and was involved in swaps trading. He directed physical and financial trading of crude oil, refined products and natural gas for Exco-Intercapital and Berisford Capital Markets Group. Garner also held positions at Enron and North Canadian Oil.

In 1999 they saw a need. “I approached Andy in 1999 and said ‘There is a big gap in this marketplace; most of these small- to midsized companies need help in managing their risk and moving their product efficiently.’ And so we created Protec, and 14 years later we are doing the same thing,” Garner says. “We have about 200 customers in 10 states. We definitely know what we are doing from a risk management standpoint, a fuel standpoint and a physical movement standpoint.”

They use the same options structures in their speculative trading as they use in their hedging business, but draw a sharp line between the two.

“We trade spread options. We try and build our options structures around the direction we think the market is going to move over a certain period of time. It could be something as simple as call spreads, ratio call spreads, iron condors, you name it,” Garner says. “I don’t believe that risk should be performance driven. You are either speculating or you are managing risk. If a trucking company has a budget and they know exactly what that budget is, the goal is not to go over budget. I am not trying to make them money or lose them money.”

The CTA, however, is successfully making money and doing it by being selective. It only trades 25 to 30 times a year, mostly in gasoline and diesel, though it occasionally trades crude. It will put on some shorter-term (five to 30 days) trades as well as those with a seasonal view that lasts from 90 to 120 days. “We keep everything within a six-month window because fundamentally that is about as far out as you can see. Things can change quickly,” Garner says. 

And that is where Greenberg’s execution skills kick in. He trades average price futures (swaps) and options either on the floor or through the Nymex Clearport facility. If they are bullish, they may buy average price futures along with an at-the-money put, creating a synthetic long call, and then sell out-of-the-money calls to mitigate some of the risk and lower the delta of the overall position. 

The settlement on the average priced futures is based on an average of each day’s settlement instead of one price, which reduces volatility in the position, says Greenberg. “A one-day move in the middle of the month could knock you out of a position. [Average price futures] mitigates the volatility and allows you time to think,” he says. 

Greenberg attributes this year’s success to some adjustments to the strategy. They reduced their time horizon and lowered leverage in response to volatile markets. “The risk-on/risk-off trade was causing [more frequent and violent] spikes and forced us to take a look at the market,” Greenberg says. 

The key, says Garner, is watching everyting. “We have customers in [the largest] demand states. We are seeing how much they are taking on a daily basis and whether that is going up or down. On the supply side we are watching the import/export market, we are watching to see what refinery output is — are there bottlenecks in the pipelines? There is not a part of the market that we don’t touch.”

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