Oil hedge funds’ highs and lows as geopolitics cloud outlook

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Hedge fund manager Doug King began 2022 thinking oil was cheap. The world, including China, was expected to recover from COVID lockdowns and demand would reignite energy markets. Then, Russia invaded Ukraine.

Hedge funds, including King’s, expected to see prices spike and they did for a while, before falling.

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Brent crude briefly hit 14-year highs at almost $140 a barrel in March. Now, Brent and U.S. oil futures have given up all of this year’s gains , leaving many funds well off their highs and a varied performance across the industry.

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King says he avoided steep losses by trading commodities other than those attached to the oil price. As he felt crude prices had become increasingly detached from fundamental factors, King decided he didn’t want to short oil either.

When President Joe Biden released a record amount of oil from the U.S. Strategic Petroleum Reserve in May, King decided geopolitics were influencing oil prices so much that he wanted out altogether.

“We de-risked from oil and decided we weren’t going to play,” he said.

The $390 million Merchant Commodity Fund is up around 52.5% for the year, having given up about 22 percentage points over the summer. King’s fund trades a range of commodities from textiles, coffee, sugar and cocoa to agricultural commodities and power.

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Bumper performances at other oil funds have also been curtailed. Pierre Andurand’s Commodities Discretionary Enhanced Fund was up 50% for the year at end-November, having been up 110.5% at end-June, a source close to the matter said.

Andurand declined to comment.

Regulatory filings say the fund trades an “energy biased commodities and macro strategy.” Generally, hedge funds have an agreement, or mandate, with their investors on what kind of trading they do.

Andurand’s trades are affected by oil prices, so he may have had less flexibility to divert to other commodities markets as crude started to fall in June.

His is not the only fund to give up half of its annual gains. Industry data suggests the performance of oil funds in 2022 was varied.

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Hedge funds that traded energy commodities using systematic – or computer-led – strategies show a narrower performance range. Among the top, Arion Investment Management’s systematic energy fund is up 31% for the year so far. The worst performer is down 4%, the data shows.

James Purdie, head of Arion’s investor relations, said thin liquidity in recent months meant fewer people were trading and investors were “sitting on their hands” as the year comes to a close.

Sam Berridge, a portfolio manager at the $4 billion Perennial Value Management, says many this year might have been misled by bullish expectations because of the war in Ukraine, but notes long term investment in oil is low.

Investors, burned in the last China-driven commodity boom, are cautious to put money into U.S. shale oil producers and the cycle of investment in oil rigs has slowed.

“There’s a tight spot up the road somewhere. Where that would be is hard to say, but it’s coming,” said Berridge, who’s natural resources fund, which invests in energy company stocks as well as directly into commodities, is up 8% as of Nov. 30.

(Reporting by Nell Mackenzie Editing by Mark Potter)



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