The hedge fund Citadel is making money in an very innovative way – predicting weather accurately!
If you put in many years of hard work at top academic institutions and ended up becoming the world’s leading expert at predicting the weather two months in advance, who do you think is the best employer to monetize your skills? Oh the answer is pretty much always “an enormous multi-strategy hedge fund.” The Financial Times reports:
In 2018 Ken Griffin’s Citadel hired a group of scientists and analysts whose weather forecasts were more accurate than those of most meteorological offices. …
Griffin and his senior team are attracted [to commodities] by the size of the asset class, its low correlation with other markets and its complexity. In gas, supply can be mapped and analysed by his large teams of researchers while the many gas hubs across the US and beyond offer numerous prices that can be traded.
Forecasting demand is much harder. Weather heavily influences usage, which is higher during hot summers because of air conditioners and in cold winters as homes are heated.
This is where Citadel is seen as having a key advantage, with its traders fed information by a weather team that uses supercomputers to run forecasts and includes specialists in areas such as thunderstorm and tropical cyclone prediction. Much of the team is based in London — well placed to capitalise on volatile European gas and power prices.
It has been bolstered in recent years with hires out of academia. Head of weather Nicholas Klingaman, formerly at the UK’s National Centre for Atmospheric Science, specialises in “sub-seasonal” forecasts. Such predictions, typically for up to two months ahead, are far more difficult than shorter-term forecasts and highly lucrative if accurate.
I feel like this could be a good perk of working at Citadel? Like if you are planning a ski trip or a beach vacation two months from now, call up the natural gas desk and they’ll tell you what the weather will be like? Citadel’s biggest weather-related move in recent years was probably moving its headquarters from Chicago to Miami, and you probably didn’t need an advanced degree in meteorology to know that that would be an improvement, but still.
It is always sort of a mixed bag, when investment firms are the highest bidder for this sort of useful-in-real-life talent and knowledge. On the one hand, wouldn’t it be nice if your phone’s weather app was super-accurate two months out? Or if farmers, utilities, etc. had this forecasting ability, instead of a hedge fund? On the other hand, I suppose the farmers, utilities, etc. get the information indirectly, in the form of price signals. And the hedge-fund bid for meteorological knowledge probably makes meteorology a more lucrative field, which leads to more and better meteorologists, which trickles down to the rest of us?