Peaks and valleys of the oil hedge fund market as geopolitics cloud the forecast

Doug King, a hedge fund manager, believed that oil was inexpensive in 2022. The COVID lockdowns were predicted to end, and demand would rekindle the energy markets. This included China. Russia then attacked Ukraine.

King's and other hedge funds anticipated a price increase, which is what happened for a while until prices started to decline.

In March, Brent crude briefly reached $140-a-barrel highs. Now that Brent and U.S. oil futures have given up all of this year's gains, several funds are performing differently across the industry and are far from their highs.

King claims that by trading commodities other than those linked to the price of oil, he was able to minimize his losses. King decided he didn't want to short oil either since he believed that crude prices had grown increasingly disconnected from fundamental causes.

King decided he wanted out of the oil business completely after President Joe Biden released a record amount of crude from the U.S. Strategic Petroleum Reserve in May.

We reduced the risk associated with oil and made the decision not to play," he said.

After losing approximately 22 percentage points over the summer, the $390 million Merchant Commodity Fund is up nearly 52.5% for the year. King's Fund trades various goods, including agricultural products, power, coffee, sugar, and cocoa as well as textiles.

Other oil funds' explosive performances have also been scaled back. According to a source familiar with the situation, Pierre Andurand's Commodities Discretionary Enhanced Fund was up 50% for the year at the end of November after being up 110.5% at the end of June.

Andurand opted not to respond.

According to regulatory filings, the firm engages in "energy-orientated macro and commodities trading." The type of trading that hedge funds undertake is typically outlined in an agreement, or mandate, with its investors.

Andurand may have had less freedom to switch to other commodities markets as crude started to decline in June because his trades are influenced by oil prices.

Not all funds forfeit half of their annual earnings, including his. According to industry data, the performance of oil funds in 2022 was inconsistent.

The performance range is narrower for hedge funds that trade energy commodities using systematic, or computer-led, techniques. The top fund is the systematic energy fund from Arion Investment Management, which has gained 31% so far this year. According to the data, the lowest performer is down 4%.

As the year comes to a conclusion, investors are "sitting on their hands" due to low liquidity, according to James Purdie, director of investor relations at Arion.

While noting that long-term investment in oil is modest, Sam Berridge, a portfolio manager at the $4 billion Perennial Value Management, claims that many this year may have been misled by bullish expectations due to the conflict in Ukraine.

Investors are reluctant to fund U.S. shale oil companies after being burnt by the previous China-driven commodity bubble, and the cycle of investment in oil rigs has slowed.

"Somewhere up the road is a congested area. It's difficult to predict where that would be, but it will come "said Berridge, whose natural resources fund, which invests directly in commodities and equities of energy companies, is up 8% as of November 30.