Sometimes the best investments are those that have been walloped.
That's what energy market traders—many of them at hedge funds down double-digits for the year—think of the opportunity in natural gas, electricity and other power-generating commodities outside of oil.
"The power market is screaming for investment. The challenges of the last two years have caused many to sour on allocating capital to longer‐dated trades. This has led to a downward pressure on prices that we believe offers tremendous value," power-focused hedge fund Elustria Capital Partners wrote in a letter to investors this month.
"The one challenge, clearly, is timing entry to the trades. It's impossible to know whether there will be a near‐term catalyst...to move the forward curve closer to fair value, or whether the current environment will require taking the positions to cash. Either way, we view the risk/reward as simply too great to ignore."
The question is if the firms can survive until their investments hit. Elustria, for example, will not: It announced Tuesday that it was shutting down after three consecutive years of losing money.
Former Elliott Associates trader Andrew Waranch and Kottke Associates portfolio manager Eric Kimmel launched the firm in mid-2011 with $75 million.
But Elustria, which traded electricity, natural gas, and coal markets, lost 3.2 percent from June to December 2011, 4.35 percent in 2012 and 9.24 percent this year through June, according to a performance report obtained by CNBC.com. Assets also never grew past $75 million. Elustria did not respond to requests for comment.
(Read more: )
Andrew Rowe's natural gas-focused hedge fund firm SandRidge Capital also shut early this year. More recently, commodity funds including Chris Levett's Clive Capital and Jennifer Fan's Arbalet Capital said they too would close following 2013 losses.
Those announcements came after the closing of two other prominent energy funds in 2012: John Arnold's Centaurus Advisors and Pierre Andurand's BlueGold Capital Management.
Others in the energy space are still bleeding money.
Sasco Energy Partners, a commodity trading advisor, is down about 21 percent this year through September partially because of incorrect bets on the price of natural gas earlier in the year. Founded in 2008 by Todd Esse and Tom Purdy, Sasco focuses on natural gas and managed $270 million as of October 1, down from $650 million as of April.
The firm has rebounded slightly. In April, Sasco hired former managing director of natural gas trading at Sempra Energy, Joe Howley; the fund is up 4 percent net of fees since May even as natural gas prices have fallen sharply, according to a person familiar with the situation. A spokesman for Sasco declined to comment.
(Read more: natural gas price chart)
Skylar Capital Management, run by former Centaurus trader Bill Perkins, is also down about 21 percent this year through September, according to a person familiar with the performance. And Copperwood Energy, another Centaurus spin-off led by Enron veteran Greg Whalley, is down about 12 percent. Both were reportedly hurt in March when gas prices rose against their short bets.
A spokesman for Skylar declined to comment and Copperwood did not respond to a request.
The Absolute Return Commodities Index, which tracks hedge funds that focus on the space, was down an estimated 7.25 percent through September. The index also fell 7.33 percent in 2012 after gains each year from 1999 to 2011.
"Gas and power trading markets will remain someone challenging for the foreseeable future," Ernest Scalamandre, founder of fund of commodity hedge funds AC Investment Management, said. "At some juncture, yeah, hedge funds that focus on the space could hit it really big. But it's not six months away."
Scalamandre said the relatively tight range of natural gas prices caused by high supply, along with low prices for coal, which is a traditional alternative to natural gas, was making it difficult for trading-oriented hedge funds to make money.
"Natural gas is stuck in a range and will likely stay so. It's good for the market, but not for trading it," he said.
(Read more: Natural gas prices cool on warmer weather outlook)
One exception is Juan Penelas and James Shrewsbury's e360 Power, which focuses on natural gas and electricity.
The $143 million Austin, Texas-based firm's flagship hedge fund is up 23.26 percent through September, according to a performance update obtained by CNBC.com. The fund rose 56.35 percent from launch in February 2011 through December of the same year. It then fell 18.10 percent in 2012. Shrewsbury declined to comment.
If funds can hang on, there could be big money to be made.
"All in all, the entire domestic energy space is undergoing a massive transformation. The shale gas drilling boom, along with the regulatory war against coal, has forever altered the energy trading landscape," the Elustra founders wrote in the letter to investors yesterday announcing their closure (the news was first reported by Absolute Return)
"Between the upcoming power plant closures and the burgeoning natural gas export market set to begin in a couple years, volatility should reign, and expectations for a rise out of the recent trading ranges should be realized," they said. "Despite the recent challenges, the future remains bright for the space."
—By CNBC's Lawrence Delevingne. Follow him on Twitter @ldelevingne.
