Hedge Funds Hammered In Ultra-Volatile Oil Markets

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By Alex Kimani


Hedge funds aren’t exactly batting 1,000 these days. And when it comes to their energy bets, it’s largely been a crash-and-burn story.

This year is threatening to deliver more of the same.

Despite recovering investor risk sentiment, hedge fund managers were in the red for the second consecutive month in September, dragging down their year-to-date return to 5.81 percent and underperforming the global equities market, which gained 2.04 percent over the month.

Since 2016, energy-exposed funds have gotten hammered by wrong-way bets on oil and gas, sparking a wave of closures in 2018. They just can’t seem to get it right, because today’s world isn’t yesterday’s world: Shellshocked on oil for the past few years, now, even things like ominous Middle East tensions that promise to spark WWIII aren’t enough to move the needle on oil for more than a day.

One of the worst hedge fund performances of recent times saw oil hedge-fund manager Pierre Andurand–of the Andurand Commodities Fund–forced to re-strategize and diversify into non-energy sectors after his fund crashed 30 percent in 2018.

To say that energy funds have been a mixed bag this year would be generous.

The price of WTI crude has dropped from more than $75 a barrel in October 2018 to $54.36 at the time of this writing, sending a wintry blast across the energy sector.

So amid the sharp fall in the oil prices that’s negatively impacted returns for many in the space, have any real winners emerged?

Let’s take a look at the performance stats …

The OP Worst Performer List:

#1 Fidelity Select Energy Service Portfolio (FSEFX)

Among funds with less than $1 billion in assets, the wooden spoon goes to Fidelity’s Select Energy Service Portfolio, which has lost 17.6 percent in the year-to-date. This fund has been one of the worst performers lately after losing 50.72 percent over the past 12 months. The fund boasts portfolio net assets of $199.72 million.

Fidelity’s Select Energy Service Portfolio invests primarily in companies in the energy service field, including companies that provide services and equipment to the oil, gas, electricity and coal industries as well as newer sources of energy such as nuclear, oil shale, geothermal and solar power. Top holdings include Schlumberger Ltd., Baker Hughes, Halliburton Co. Oceaneering International Inc., Shelf Drilling Ltd and Patterson-UTI Energy Inc.

#2 Oil Equipment & Svcs UltraSector Pro Svc (OEPSX)

OEPSX has endured torrid times, with its value tanking 30.1 percent.

The firm has $6.1 million in total assets and has lost 67.5% of its value over the past 12 months, the worst in its category.

#3 Ivy Energy Fund (IEYAX)

Kansas-based Ivy Investment’s Energy fund has also been a notable disappointment after losing 9.3 percent in the year-to-date and 41.3 percent in the past year. The fund’s investment objective targets investing at least 80 percent of its net assets in securities of companies within the energy sector. Ivy has portfolio assets of $251.3 million.

#4 Vanguard Energy Fund Admiral Shares (VGELX)

Vanguard Energy Admiral, one of the biggest names in the sector, has also been uninspiring after managing YTD gains of -0.32%.

The giant fund has net assets of $3.6 billion with a high expense ratio of 1.41 percent.

So, who actually recouped and ended up outperforming on the hedge fund scene? Two funds in particular are worth your time, but keep this in mind:

This year seems to be bucking the long-term trend of smaller hedge funds outperforming their bigger brethren.

The energy leaderboard this year has been dominated by growth-focused funds.

Top prize goes to …

#1 Vanguard Global Capital Cycles Fund Investor Shares (VGPMX)

Vanguard’s Global Capital Cycles fund is one of the better performers after racking up gains of 12.5% YTD. The fund manages $1.29 billion in net assets with an expense ratio of 0.33%.

The fund invests in both U.S. and foreign equity securities with the objective of generating above-average returns by investing in companies and industries where capital spending is declining, while avoiding those companies whose business models can be easily replicated.

The fund typically invests across a range of sectors as well as a mix of developed and emerging markets. Formerly known as Vanguard Precious Metals and Mining fund, the fund now focuses on capital-intensive industries and is sub-advised by Wellington.

#2 BlackRock, Inc (NYSE:BLK)

BlackRock is the leading energy hedge fund. It’s managed to put its annus horribilis behind it and is one of the better-performing energy funds this year.

Blackrock has gained 10.2 percent so far this year after slumping 35 percent in 2018 and losing its wealthy investors a harsh $90 billion. The firm has a market cap of $67 billion and a three percent dividend yield.

BlackRock All-Cap Energy & Resources fund (BACSX) has also managed to reverse last year’s losses and is now sitting on a 3.53-percent YTD gain. Ther fund boasts $65 million in net assets and invests in global energy and natural resources.

By Alex Kimani for Oilprice.com


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