Dec 12 (Reuters) – Hedge fund manager Doug King starts 2022 thinking oil will be cheap. The world, including China, is expected to recover from COVID lockdowns, and demand will reignite in energy markets. Then Russia invades Ukraine.
Hedge funds, including the Kings, have expected prices to surge, and have been for some time before falling.
Brent crude briefly hit a 14-year high near $140 a barrel in March. Brent and US oil futures have now given up all of this year’s gains, with many funds well below their highs and mixed performance across the industry.
King said he avoided significant losses by trading commodities other than those associated with oil prices. King, who felt oil prices were increasingly disconnected from fundamental factors, decided he didn’t want to short oil either.
When President Joe Biden released a record amount of oil from the U.S. Strategic Oil Reserve in May, King wanted to do so completely, as geopolitics have greatly affected oil prices.
“We took the risk out of oil and decided not to play,” he said.
The $390 million Merchant Commodity Fund is down about 22% over the summer but is up about 52.5% for the year. King’s Fund trades a variety of commodities, from textiles, coffee, sugar and cocoa to agricultural products and electricity.
Performance of other oil funds has also been subdued. Pierre Andurand’s Commodity Discretionary Fund was up 110.5% at the end of June, compared with a 50% gain for the full year at the end of November, according to people familiar with the matter.
Andurand declined to comment.
The fund trades “energy-biased commodities and macro strategies,” according to regulatory filings. Hedge funds generally agree or are obligated to enter into what types of transactions with their investors.
Andurand trading is affected by oil prices, which may have reduced the flexibility to divert to other commodity markets as oil prices began to fall in June.
He’s not the only fund to give up half of its annual profits. Industry data suggests mixed performance for oil funds in 2022.
Hedge funds that used systematic or computer-driven strategies to trade energy commodities have a narrower range of performance. Among the top, Arion Investment Management’s structured energy fund is up 31% year-to-date. As the data shows, the worst performers are down 4%.
James Purdy, head of investor relations at Arion, said the lack of liquidity in recent months meant fewer people were trading and investors were “on the sidelines” as the year turned.
Sam Berridge, portfolio manager at $4 billion Perennial Value Management, said bullish expectations may have been derailed this year because of the war in Ukraine, but the long-term outlook for oil is optimistic. He points out that investment is low.
Burned by the last China-led commodities boom, investors are wary of putting money into U.S. shale oil producers, and the oil rig investment cycle is slowing.
“Somewhere is stuck. It’s hard to say where it will be, but it will come,” said Berridge, a natural resources fund that invests directly in energy company stocks and commodities. November 30th.
Reporting by Nell Mackenzie Editing by Mark Potter
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