Wall Street Makes Money Off Snow Bets

Feb. 10, 2010 — -- Long before today's snowstorm was but a twinkle in Mother Nature's eye, players on Wall Street and in businesses affected by snowfall were planning their moves in a small but growing market: weather investments.

Jeff Hodgson, the president of Chicago Weather Brokerage, said he was getting calls from clients in December who were interested in making investments based on snowfall in January and February.

Those who bet on greater snowfalls, including some financial institutions and property management companies who contract for snow removal, are making money right now, he said. Meanwhile, those who need snow to be successful -- like ski resorts and snow plow companies -- could be losing money in the weather market because of investments they made to protect themselves against low snowfall. Still, they're also seeing higher revenues because of the demand that more snow generates for their core businesses.

"Ultimately in the last couple of weeks with the snowstorms that have developed, everyone's gotten what they wanted," Hodgson said. "It's all about transfering risk and managing exposure and that's what we're doing in the weather market."

Thanks to interest in the weather market and, more broadly, weather-dependent investments such as commodities, Wall Street may be the go-to place for weather forecasting.

Just ask Corey Lefkof.

Lefkof is a Houston-based meteorologist at Deutsche Bank's commodity trading business. By 6 a.m. most mornings, Lefkof has reviewed the latest overnight weather models, drawing from reports by private forecasting companies, the U.S. government and his employer's own satellite subscription service.

"It's a much more stressful environment than anything I've ever been involved with," he said, "but it's also taught me a lot about risk-reward management."

He estimates that about a dozen or so of his fellow meteorologists do the same work at other big banks -- JPMorgan Chase is currently advertising on Internet job boards for a "supporting meteorologist" to assist its chief meteorologist -- while others work at hedge funds.

Still other financial firms and funds rely on private weather consulting services, and some have tried both: Goldman Sachs and Barclay's Capital both hired their own meteorologists before turning to outside providers, industry sources say.

Lefkof and others will tell you that weather predictions aren't just useful for planning your vacation or your choice of jacket -- they drive the global economy. Under the radar as they may be, Wall Street's weather men are as crucial as any analysts because of the sheer size of the money being wielded -- in the trillions, by some estimates -- in weather-linked investments, especially commodities.

Why commodities? Because things like crop yields and energy demand can depend heavily on the weather. Think of the recent cold snap that gave orange growers anxiety in Florida, the floods that soaked Iowa corn fields in 2008 or the record low temperatures driving up heating bills in Maine last month.

"If we know it's going to be cold in large demand centers of the Northeast, Midatlantic, Ohio Valley, Midwest," Lefkof explained, "a lot of our investors might speculate and buy natural gas futures."