Weather Toolbar - 7 Day Weather Forecast - Weather Taskbar

Aug. 1 (Bloomberg) -- Credit Suisse Group trader Patrick Ayash rarely reads earnings estimates and just skims news about inflation. One thing he never misses: the daily weather report.

Ayash, 31, is part of an army of mathematicians, hedge-fund whizzes and programmers pouring into the $19 billion market for weather futures, financial instruments tied to everything from storms over Kansas, an early frost in the Netherlands, or a frigid spring in New York.

The market was once a sideline for utilities looking to insure against swings in demand for natural gas or electricity. Now, with hedge funds increasingly hungry for market-beating returns, more are gambling on untested strategies. Tudor Investment Corp., D.E. Shaw & Co. and other funds are turning teams of statisticians loose to devise novel ways of exploiting weather fluctuations.

``There are no 100 percent forecasts -- but what if we can say something with 80 percent confidence? That's where it gets interesting,'' says Brad Hoggatt, 35, chief portfolio manager of MSI GuaranteedWeather LLC, which sells weather futures to utilities and manages its own portfolio in Overland Park, Kansas.

Enron Corp. sold the first weather derivative 10 years ago, agreeing to pay a utility $10,000 for each wintertime degree that was below normal. After a lull following the collapse of the Houston energy trader, the market is exploding. Trading in weather contracts has jumped 100-fold in the past four years, according to the Chicago Mercantile Exchange.

In the year ended March 31, 2007, the contracts had a notional value, or face value, of $19 billion, according to the Weather Risk Management Association, a trade group in Washington.

Climate-Change Fears

Brokers attribute much of the increased volume to hedge funds, which buy and sell the contracts based on minute changes in forecasts. Fears of global climate change are helping too, drawing in companies from power suppliers to ski resorts that want to transfer the risk of adverse weather to outside investors.

``Weather derivatives are not exotic at all within the company now,'' says Gearoid Lane, managing director of British Gas New Energy, a unit of Centrica Plc, the U.K.'s biggest natural gas distributor. The Windsor, England-based company entered into one of the first multiyear weather contracts in 2002, a five-year deal that guaranteed a payout in warmer-than- expected winters.

Earnings reports and interest rates aren't the drivers of this market. The fundamentals here are temperature, rainfall, even wind speed.

Some firms pay $60,000 annually for customized weather predictions. Others hire their own meteorologists at salaries of more than $100,000 a year.

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