HEDGEFUNDS
index at any given time. Indeed, a significant proportion of the gains in crude oil prices earli-
In2007,theGEMIrecordedapositive er this year can be attributed directly to a weaker US dollar alone.
gain of 10.22% but through the end of Rising energy and commodity prices in turn have built further infla-
JulytheGEMIhasrecordedaloss,year- tionary pressures into the economy.
to-date, of just -1.82% (figure based Butattheheartoftheriseinenergyprices–especiallycrude –are
on July estimates). Despite that, the the fundamentals. Supply and demand are so closely matched that
index did reach an all time high of any supply disruption has had a disproportionate effect on price for-
1,410.67 in June. Indeed, through the mation while, until very recently, little demand response to higher
first quarter of 2008, the GEMI was prices had been observed. This situation continues and is a signifi-
actually down by 4.04%. Plainly, ener- cant factor in the sustained rise in oil prices.
gy hedge funds had a difficult first
quarter despite the rise in crude oil and
Rising energy and commodity prices [H1]
other energy futures. Unfortunately,
in turn have built further inflationary
theindexperformanceisalsoverycom-
pressures into the economy
plex to explain.
The GEMI gained 1.96% in June, The US natural gas market, after two years of being in bearish
2008 but lost an estimated 5.08% in mode,alsostartedtotrendhigherthisyear;notonlyinthefrontcon-
July, 2008. This certainly shows how tracts but also in the deferred contracts as the US is seen to increas-
volatile the sector is and shows that inglyrequireLNGimportsinordertoavoidanin-seasonandoff-sea-
July was one of the most disappointing sonstoragedeficit.TheUSnaturalgaspriceisthereforenowincom-
months this year in terms of returns. petition with higher European and Asian natural gas prices. While
many natural gas trading funds, both relative value and directional,
FactorsImpactingEnergyHedge wereabletoidentifythistrendandmakesignificantpositivereturns,
FundsPerformanceinH1,2008 not all of them did and at least one natural gas trader, who had had
The first two quarters of 2008 were bear spreads on their book, suffered very poor performance in the
dramatically different in terms of ener- first quarter of this year.
gy hedge fund performance but in nei- Also in the first quarter of the year, electricity market traders
ther quarter did many energy hedge experienced issues due to a bear market on the Nordpool
funds track the performance of crude exchange for near-term contracts. At the same time, as a result of
oil. Let’s examine both quarters. strong coal prices, the cost of producing power in a reference coal
plant also increased substantially, providing support to contracts
Quarter 1, 2008 further out on the curve. While some hedge fund managers were
The first quarter of 2008 was actually able to capitalise on prices on long-dated positions, prices are now
a very difficult quarter for any form of close to all-time highs which contributed to making managers
investment for a number of reasons. more careful and many were typically unable to capitalise on
Various economic reports and indices falling near-term prices.
showed that the US economy was in It was also quite a difficult environment for equity market neutral
serious difficulties prompting the US managers in the first quarter as it was a momentum driven market
Federal Reserve to cut interest rates a punishing managers who applied fundamental trading strategies.
number of times over the period. Many stocks were driven by forced sellers and many market neutral
Meanwhile, the European Central Bank, funds had portfolios that were overall beta neutral but they were
remained more focused on inflationary able to take some sector bets such as going long alternatives and
factors, kept interest rates steady. This short transportation. Also some market neutral funds took size bets
had an impact on the US dollar which meaning that they went long on small or mid-sized companies.
weakened considerably over the quar- Despitethestrongcrudeoilfuturesmarket,energylong/shortequi-
ter and remains weak today. The twin ty markets were extremely volatile over the quarter. The S&P Energy
issues of the fall out from the credit cri- Index fell in January (-10.93%), in February it made +6.33% and in
sis and the impact that had on invest- Marchitwasdown-2.67%,foratotalreturnof-7.53%forthequar-
ment banks and financial firms in par- ter. Unfortunately, the alternative energy equity sector, solar, wind,
ticular, along with the massive down- and so on, also collapsed in the first quarter hurting dedicated man-
turn in the US Housing market, also agers and impacting the more diversified energy equity managers.
had a dramatic impact on equity mar- Emerging markets were relatively stable during the financial crisis
kets. The S&P 500 index was down but energy managers dedicated to emerging market energy stocks
7.53% in the first quarter of the year. often suffered from poor stock selection and country risk mainly in
Other global equity markets turned in Latin America, the Philippines, Russia and the Ukraine.
similar performances. Even the MLP centred hedge funds had a very poor quarter. MLPs
The decline in the strength of the US are mainly concentrated in US midstream assets like pipelines &
dollar also impacted commodity prices storage facilities and were impacted significantly by the credit crisis
(mostofwhicharepricedinUSdollars). and its liquidity crunch. The Alerian MLP Index was down by -7.27%
52 SEPTEMBER 2008 COMMODITIES NOW
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