Weather forecasters cash in on Wall Street

Hedge funds and Wall Street firms are increasingly turning to meterologists to predict the impact that weather conditions willl have on stocks. But rather than using public meteorologists offices banks are employing their own weather specialists in house.

Investment banks and hedge funds have traditionally employed mathematicians, physicists, computer scientists and economists for risk and analysis, but according to a Reuters report meteorologists are now in big demand on Wall Street.

Merrill Lynch already has five in-house meteorologists who "track every cloud in the sky", while Morgan Stanley and UBS are also employing weather experts.

"If banks relied on external sources of information such as the met office analysis, then they would be placing their risk on information supplied by an outside entity and the information and the analysis behind it would not be unique,"  Jason Ward of recruitment firm NER Finance told Reuters.

Businesses now realise that they can try and mitigate the effects of weather - even bad weather - and use it as an advantage, says Emily Shuckburgh, a director of an independent weather consultancy Weather Informatics.

The Cumulus Weather and Cumulus Energy Funds at hedge fund group PCE Investors have chalked up returns of 39% and 22% during the year by using meteorologists to predict the impact that the weather will have on stock prices, says Reuters.

This focus on the weather has enabled hedge funds to profit handsomely from bad weather. Irish drinks group C&C saw its profits plunge this year after the wet weather this summer hit sales of its Magners cider. But Cumulus had anticipated this and taken positions in the stock accordingly.

The fund also managed to determine in advance that colder conditions in Germany were going to continue through July, so it took short positions in German electricity futures, and clocked up a windfall when the price fell about 30%.

Examples of the weather forecasters getting it wrong were not included in the report.

However, although the Reuters report focuses on meteorologists to gain trading advantage, there may also be a case for using meteorology to cope with the risks facing financial services firm from global warming and climate change to financial services firms. 

Last year the FSA warned of the "considerable risks and challenges that climate change poses to the financial sector". These include greater costs to firms through extreme events and possible equity market volatility arising from these costs.

Furthermore the financial centres of London, New York, Tokyo and Hong Kong are all located in coastal areas, and are likely to be particularly affected by global warming as flooding increases and changes in soil composition weaken buildings' foundations.

With all this climate change and volatile weather activity expected, meteorologists could be in demand for a long time.