Recent rumours in the emissions market are that the hedge funds have been caught with their trousers down. Hedge funds operate in the market generally through proven market models. Many of these models rely on some key fundamentals. The biggest being that their is a correlation between gas, oil, power and emissions.

Recently the correlation's have started to break down the best example of this being when oil prices rose and gas prices fell. Many funds will look to spread risks across commodities but with the correlation breaking down, some of their long positions have look untenable. The dreaded tap on the shoulder from the risk managers to say cut your positions has been seen and they have had to unload length in a market which is significantly below where they bought. This unloading has pushed the market lower than anticipated.

So will it spring back up again, market theory says yes it will. But there are some fundamentals which need answering, why has the correlation broken down, is there a new type of correlation (is emissions less important than it once was!). These questions will take time to answer and in the meantime the fundamentals suggest that a mild Winter and plentiful supply, could mean further drops.