Shield Plus Natural Gas

  • Investment Objective & Portfolio Management: To simultaneously provide the potential for capital appreciation and preservation by employing a market-neutral investment approach. Such an approach combines two opposing positions, such as a long put & long call, and may make money as one position’s gain more than offsets the other’s loss regardless of market direction. Under such combined call & put positions, a loss may be realized if the market remains stable; similarly, any position executed by Shield Plus may lose money. To enhance the likelihood of capital appreciation, the investment approach pursues market-neutral positions in volatile markets. This strategy focuses only on the volatility in natural gas. Emphasis will be placed on achieving protected, absolute returns over a rolling two-year horizon rather than superior performance relative to an index or other benchmarks.
  • Protection: To maintain protection of principal, the market-neutral approach uses only fully-covered U.S. exchange-traded options. As a means of achieving added protection, this strategy does not borrow uncovered cash/securities to lever returns and risk. Further, unlike a long/short equity fund, where the long and short positions have two different underlying companies and unlimited risk, this strategy’s market-neutral positions have the same underlying market and calculable limited risk.
  • Performance: The Shield Plus Natural Gas strategy is ranked #1 over the three-year period (2004 to 2006) for option-based strategies in “The Barclay Institutional Report”. Accredited investors can request updated performance by contacting Shield Plus.

Reasons to Invest

  • With the world population growing by over 75 million people per year (increasing energy demand) and fossil fuel supply being limited to what is in the ground, the long term trend for energy prices is likely up. We also believe supply disruption, shortage or excess versus demand can occur over any short period of time. As evidence, the 1/22/10 EIA Storage Report shows the following: it is the first time in EIA’s 16-year history of weekly inventory data that combined net withdrawals from storage over 2 consecutive weeks have exceeded 500 Bcf; inventories are now 6 Bcf below the 5-year average, after beginning the year 311 Bcf above the 5-year average. Such events and economic imbalances create price volatility.
  • From Mark Williams, AP Energy Writer, On Monday December 21, 2009, 9:11 am: There is possible legislation, referred to the NAT GAS legislation - House Bill 1835 and Senate Bill 1408. This legislation is geared to improving the climate by reducing carbon emissions. Currently, “27 percent of the nation's carbon dioxide emissions come from coal-fired power plants, which generate 44 percent of the electricity used in the U.S. Just under 25 percent of power comes from burning natural gas, more than double its share a decade ago but still with room to grow.” Natural gas emits half as much carbon as coal when burned to generate the same amount of electricity. Looming climate (i.e., carbon emission, cap & trade) legislation has altered the math used to determine the cheapest way to deliver power. Natural gas is likely the cheapest candidate. US utilities aren't waiting for Washington to jump on the natural gas bandwagon. Exxon Mobil Corporation gave its answer to the cheapest way to deliver power by recently acquiring XTO Energy Inc. for $30 billion. The move will make Exxon the country's No. 1 producer of natural gas. Exxon expects to dramatically boost natural gas sales to electric utilities.
  • When considering heavy-duty vehicles, natural gas is probably the cheapest and cleanest source of energy to power such big rigs (current battery technology is not economical). Even Al Gore has admitted that for the big trucks, natural gas makes the most sense.
  • Electric cars, such as the Nissan Leaf, are being introduced and sold in late 2010. Such electric cars, when re-charging individually and given current technology, will likely consume roughly three times as much electricity as a typical home’s daily usage (“Plugged In” article, Star Tribune, 2/19/10). Neighborhood blackouts are not out of the question. Additional natural gas turbines will likely be one source used to meet the increased electricity demand.
  • Hurricanes, like Katrina in 2005, and terrorism could once again shake natural gas markets.
  • The Shield Plus Natural Gas strategy is potentially non-correlated to traditional assets because the market-neutral approach creates a non-linear return pattern and invests directly in different markets. Further, the approach is bottom-up where our focus is on security selection and not on market timing. The strategies return patterns are also engineered to limit risk to a certain dollar amount over the rolling two-year horizon. 

This natural gas chart shows prices can dramatically climb and fall. The Shield Plus Natural Gas market-neutral approach capitalizes on such price volatility.