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London-based hedge fund Northlander Commodity Advisors returned 52.7 per cent to investors in 2018, excluding commission and fees, as its major bet on rising European carbon prices paid off.

Ulf Ek, founder and chief investment officer of the $484m fund, told his investors in an end of year note seen by the Financial Times that Northlander had benefited from “an unusually high conviction on the carbon trade” that saw carbon allowances under the EU Emissions Trading System increase by 230 per cent in the year.

The Financial Times reported in September that Northlander was one of an elite group of specialist traders cashing in on the carbon rally, which followed changes to regulations designed to tighten the supply of allowances and incentivise the switch away from fuels like coal towards gas and renewables.

Mr Ek said in his note to investors that he saw additional opportunities in carbon in the future.

“Rarely, if ever, have we seen an opportunity like the EU ETS [Emissions Trading System] where a regulatory change results in a dramatic repricing of a commodity and the market simply didn’t spot the change for 6 months, giving us time to establish a leveraged position using options to reduce drawdown risk,” Mr Ek said.

“The current market price of around €25 is still far from a fundamental equilibrium price, which we see around €35-40. We can also picture a scenario where prices go even higher once coal to gas fuel switching starts taking place.”

The performance of Northlander contrast with other traditional commodity funds, which struggled due to oil’s late-year collapse in 2018, as prices reached a four-year high of $86 a barrel in October before dropping by roughly a third in the fourth quarter.

Andurand Capital Management, one of the biggest specialist oil hedge funds, was left nursing bruising double-digit losses in late December according to numbers provided to investors and published by HSBC, while the Dorset Energy fund lost 38 per cent last year to December 28, including a 23 per cent drop last month.

Mr Ek at Northlander said other commodities aside from carbon had proven challenging in 2018, including coal and oil in which his fund had smaller investments.

Investor appetite for commodities is also under question given the recent volatility. Despite Northlander’s bumper returns its assets under management remained relatively flat at $484m, with Mr Ek pointing to “profit-taking, particularly from our fund of fund investors”.

Mr Ek said in the note that he is looking for additional investors, believing “we can comfortably manage up to $1bn in the space we are currently trading”.