The Economist has a point though - namely that the growth in the OTC weather derivatives market can largely be attributed to hedge funds trading the contracts. Although the weather risk market began life as a way for energy companies to hedge their weather risk it seems that hedge funds are now the dominant players. In that sense the market has failed in it original objective (to provide a way for corporates to hedge the impact of weather). The Chicago Mercantile Exchange has been listing weather contracts successfully for a number of years and hedge funds increasingly like to 'play' the market.

Structured Products has also written about how weather contracts are finding their way into investor portfolios. In March 2005, for example, I wrote how Dexia was considering launching a weather related structured product for the Belgian market (nothing came of the idea, but click here for the story). Famously Bristol & West did succeed in bringing a weather product to the retail market (click here for the story). Having said that the snow option part of the product didn't pay out and the product was really just a simple income and growth plan.

Last year a number of banks, including ABN Amro (also mentioned in The Economist article) brought emissions-based certificates to market. Presumably it's just as easy to do something weather related?

As hedge funds continue to invest in the weather market it's only a matter of time until we see structured products providers offering retail investors weather-linked investments. Or has the cold in London got to me? Let me know your thoughts...