2008EnergyHedgeFund
Performance&thePriceofCrude
ByMichaelLaznicka
WHILST THE PRICE of crude oil and Many of the 120 remaining commodity futures funds actually
other energy products have progres- tradeavarietyofcommoditiesincludingothernon-energycom-
sivelyrisen–andsubsequentlyfallen– modities and may have only a small proportion of their assets
spectacularly this year, many energy exposedtoenergycommodityfuturessuchascrudeoil,naturalgas
hedgefundreturnshavenotbeenpar- anddistillates.Thefewremainingfundsthatarefocusedonenergy
ticularly stellar. Understandably, this futureswillalsomostlikelyhaveaportfolioofenergyfuturesand
has caused some confusion among optionsofwhichcrudeoilmaybeonlyasmallcomponentasthe
investors, prospective investors and fund’sstrategymayfocusprimarilyonnaturalgasorelectricpower.
commentators. How is it that while Lastly,manycommoditytradingfundsdonotfollowasimpledirec-
crudeoilfuturesrosebysome40%this tional strategy instead preferring to minimise risk using spreads,
year, the average energy hedge fund marketneutraland/orotherstrategies.
hasbarelybrokeneven?
Thefactthatthisquestionisaskedat ... many commodity trading funds do not follow a
allhasagooddealtodowithgeneral
simple directional strategy
misconceptions regarding energy
hedgefunds,theirstrategiesandtheir Thesimplefactisthatveryfewhedgefundsactuallytradeonly
role in the marketplace. While media crudeoilfuturesdirectionallythesedays.Thosefewthatdohave
andpoliticiansalikearequicktoidenti- actuallyproducedscintillatingresultsinmanyinstancesbutremain
fy ‘speculators’ (and hedge funds in exposedtoextremelyvolatileandsomewhatunpredictablecrude
particular) as the culprits behind the markets.Inotherwords,theystandatrisktolosemoneyjustasfast
progressive rise in energy prices, the astheymakemoneyifcrudefuturesmoveinthewrongdirection.
truthisthatthissimplyisn’tthecase Directionaltradingwithanemphasisonasingleenergycommodity
andevenasomewhatcursoryreviewof isahugelyriskladenstrategyandnotonethatmoresophisticated
the situation would be sufficient to investorswoulddeemoverlyattractive.
makethatobvious. Itissimplyamyththatenergyhedgefunds,alsocommonlyviewed
assophisticatedtradingvehicles,areonaveragegeneratinghuge
EnergyHedgeFunds& profitsfromrisingcrudeoilprices.
CrudeOilFutures Also,itisbelievedthatoutofthe9,000orsootherexistinghedge
Therearemorethan600hedgefunds fundsonlyabout15%ofthemtradeincommodityfuturesand
focused on commodities, natural speculatefromtimetotimeincrudeoilderivatives,thusnotadding
resourcesandenergybutonlyaround substantialvolumetothesemarkets.
120ofthoseactuallytradingcommodi-
ty futures. The remainder make their EnergyHedgeFunds&TheirYeartoDatePerformance
moneyusingavarietyofstrategiesthat Beforecontinuingwiththisdiscussion,itisworthlookingatenergy
rangethroughequitylong/short,debt, hedgefundperformances.WecandothisbyexaminingtheGardner
andbonds,otherliquidtradableinstru- EnergyMacroIndex
®
(GEMI
®
).
mentssuchasExchangeTradedFunds TheGEMIprovidesamacroviewonvariousnaturalresourcemar-
(ETFs)andMasterLimitedPartnerships ketsbylookingattheperformanceofcarefullyselectedandrated
(MLPs), as well as structured finance underlyinghedgefundsintheenergysectorandactingasahypo-
deals, electricity, carbon markets and theticalbenchmarkforinvestors.Theindexcomponentsareselect-
weatherderivatives.[AMasterLimited edbyGardnerusingdefinedandobjectivecriteriaandtheindex
Partnershipisalimitedpartnershipthat valueiscalculatedmonthlyusingpre-formulatedindexcalculation
is publicly traded on a securities rules. The existing Gardner Energy MacroIndex
®
now has more
exchange.Itcombinesthetaxbenefits thanathree-yeartrackrecord.Infact,morethananyotherindex,
ofalimitedpartnershipwiththeliquidi- theGEMIaffordsusarealglimpseintotheperformanceofthe
ty of publicly traded securities]. Such energyhedgefundsuniverse.Thisperformancereflectsthereturns
fundsmayormaynotbenefitfroma ofagroupofestablishedandemergingenergyhedgefundman-
rapidandsustainedriseinenergycom- agerswhowereselectedbasedonobjectivecriteriaarrangedina
moditypricesaswillbediscussed. proprietaryselectionmatrixconsistingof35-50componentsinthe
50 SEPTEMBER 2008 COMMODITIES NOW
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