HEDGEFUNDS
over the quarter and MLP funds were often tracking the Index per- future contract forward (mostly each
formance. The shipping markets anticipated slowing growth and month) and therefore create huge
after a strong increase in 2007, freight rates decreased hence equi- paperdemandoncommoditiesingen-
ty managers suffered from exposure to small and mid cap names. eral. The investment vehicles, which
allow exposure to these indexes, are
Quarter 2, 2008 definitely not hedge funds and there-
After a very difficult first quarter energy markets stabilised in the fore it is feasible to say that hedge
second quarter and rising crude oil, natural gas and distillate prices funds are not the major factor in driv-
helped to push many hedge fund strategies in the energy sector ing crude oil markets up.
back into positive territory; long/short equity managers were partic-
ularlyabletoprofitalongwithrelativevalueandequitymarketneu- Conclusions
tral strategies. As can be observed from the forgoing
NYMEX WTI Crude oil prices rose by 37.82% during the quarter commentary,energyhedgefundsruna
duetoUSDollarconcerns,thedirectionoftheUSinterestrates,ten- diverse set of strategies and their per-
sions in Latin America and ongoing concerns over Iran. The NYMEX formanceisnotatalldirectlyrelatedto
Henry Hub natural gas contract also rose over 32% in the second the price of crude. Indeed, the number
quarter on low inventory levels and lower LNG imports. The NYMEX of funds pursuing long-only directional
Gasoline contract rose correspondingly due to anticipation of rising oil futures or, indeed, energy futures
future demand in the coming driving season. Meanwhile, the strategy, represent only a small part of
NYMEX Heating oil contract rose 28%, as lower refinery rates con- the energy hedge fund universe and
tributedtoa12%reductionindistillatesuppliesascomparedtothe thus, any average of energy hedge
previous year. fundsperformancewillneverreflectthe
The best contributions during the second quarter came from performance of crude oil futures.
energyrelativevaluetraders,followedbylong/shortequitytraders, In 2008, more general market condi-
energy mezzanine debt and equity market neutral traders. These tions have had much more of an
strategies were strengthened by a general bullish market senti- impact on many managers’ perform-
ment, bullish moves in the natural gas markets and stable credit anceintheenergysectorthantheprice
spreads. Similar factors caused energy directional traders to deliv- of oil.
er positive contributions. In the case of our own index of ener-
gy hedge funds – the GEMI – while it
July2008:TheMonthTheMarketReversed provides a significantly more balanced
Despite the very positive second quarter it needs to be noted that view of energy hedge funds perform-
themonthofJulywasaverydifficultmonthforalmostallmanagers ance than any other existing metric or
intheenergysectorandbothextremevolatilityandliquiditybottle- index, it is designed explicitly to track
necks pushed the entire energy sector and all manager performanc- performance of all strategies in the
es down. This was mainly attributed to the wrong calendar spread energy sector and to do so in a way
positions that many managers had on and through sticking to fun- that minimises volatility. It will there-
damentalfactorsintheirexposuretomidsizeenergycompanies.In fore not reflect the large and volatile
... more general market conditions have
directional commodity price swings of
crude oil but rather profit from the var-
had much more of an impact on many ious investment styles across the ener-
managers’ performance in the energy
gy sector through a balanced, multi
sector than the price of oil
strategy approach. As such, the index
will not reflect the huge market swings
comparison, most commodity indexes were down by an average of incrudeoil,butratherprovidebalanced
12%, energy equity indexes down by an average 15% and most exposure to all energy markets with a
energy prices also down by an average of 15%. Energy sub-sectors, low volatility.
such as oil services and exploration & production, performed poorly All of this is not to say that a small
withlossesrangingbetween-17and-18%.Truly,thiswasadifficult group of managers with appropriate
and challenging month and many risk systems failed. strategies in crude oil and other energy
commodity markets didn’t outperform
SpeculatorsintheCrudeMarket to date in 2008. However, they repre-
Speculators in crude oil are mainly long only investable commodi- sent a small number of funds and
ty indexes which are market weighted and have received a massive strategies in what is a very diverse
influx of funds over the past five years. These long-only indexes group of hedge funds
•
reflect the price movements of selected commodities where crude
oil isasubstantial portion.Manystructuredproductsexist onthese
MichaelLaznicka is CEO at
indexes and hence allow investors to speculate by diversifying into
Gardner Finance AG, Switzerland
direct commodity price exposures. These indexes need to roll their
www.gardner.ch
COMMODITIES NOW SEPTEMBER 2008 53
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