Bad bets on oil, gas spark wave of energy-fund closures
(Repeats for additional clients with no changes to text)
By Devika Krishna Kumar and Liz Hampton
NEW YORK/HOUSTON, Jan 18 (Reuters) - Energy fund managers
took heavy losses last year with wrong-way bets on the prices of
oil and natural gas, leading to a wave of closures in the
volatile fund sector.
The number of active energy-focused funds fell to just 738
in 2018 through September from about 836 in 2016, according to
the latest available data from hedge funds industry tracker
Eurekahedge. That's the lowest number of active funds since
2010.
The number of funds solely focused on oil or gas has tumbled
to 179 in 2018 from 194 in 2016. Funds that have suspended
operations included high-profile names such as Jamison Capital's
macro fund, T. Boone Pickens' BP Capital and Andy Hall's main
hedge fund at Astenbeck Capital Management, along with smaller
niche funds such as Casement Capital.
"There is a massive decline in the number of funds, and no
replacements," said David Mooney, founder of Casement Capital.
"There has been a near 'extinction event' in commodities hedge
funds."
"We had about 16 large hedge funds trading natural gas in
Houston a few years ago," he said. "That number is now reduced
to a small number of managers."
Some funds saw investors pull out because they increasingly
view energy as an unsafe spot for their money. Casement
suspended operations after difficulties raising investor
interest, two industry sources said.
The firm was supported by Lighthouse Partners, according to
a regulatory filing. Lighthouse declined to comment, and Mooney
would not elaborate on the reasons for Casement's decision to
close.
"All hedge funds, including commodities, that are being
scrutinized for near-term performance are coming under
pressure," said Jonathan Goldberg, founder of one of the
best-known energy-focused hedge funds, BBL Commodities.
Closures of energy-focused hedge funds have outpaced
launches in the last three years, according to data from
Eurekahedge.
"It becomes self-reinforcing," Goldberg said in an
interview. "If people lose money and are seeing negative
feedback for it, they cut risk and it becomes harder and harder
to manage the business."
Macro hedge funds - those with strategies based on broad
global macroeconomic trends, such as a bet that oil prices will
rise - were among the hardest hit, falling 3.6 percent in 2018.
That's the weakest annual performance since 2011, when such
funds fell 4.2 percent, according to the Hedge Fund Research
(HFRI) Macro index, a key industry index.
Through mid-December, commodity trading advisors (CTAs) were
down by 7.1 percent, according to a late December estimate by
Credit Suisse.
In December, Goldberg said he would wind down BBL
Commodities' flagship fund and focus instead on longer-term
trading opportunities. Goldberg's BBL Commodities Value Fund
lost 14.2 percent in July, Reuters reported. Goldberg said in
December that returns had been "limited" recently.
BAD BETS ON OIL, GAS
Funds took heavy losses this past year when oil prices took
an unexpected dive beginning in October amid growing worries
about oversupply and weakening demand. U.S. oilfields hit an
all-time production record last year at more than 11.5 million
barrels a day.
A sharp rise in natural gas prices in late 2018, on concerns
of tight supplies and cold weather, also added to the pain
because many funds had paired bets on lower natural gas and
higher crude.
Fluctuations in prices typically create opportunities for
fund managers to book a profit, but the moves of oil and gas
prices followed a prolonged period of subdued volatility in
energy markets and caught fund managers off guard.
Oil prices had rallied through most of the year, and hedge
funds built increasingly large bets on the rally continuing.
Money managers began the year with a record number of
bullish open positions in U.S. crude and largely
maintained them near those levels until mid-year.
That changed late last year, when the U.S. granted waivers
to big purchasers of Iran's oil after reinstating sanctions on
the nation, and as the United States, Russia and Saudi Arabia
all produced at record levels, feeding worries about a supply
glut.
The market sunk in a series of volatile trading days as
funds rushed to unload positions.
INVESTOR PRESSURE
Hedge fund investors said they do not see the situation for
niche funds improving. Among those that have been having the
most difficulty are natural gas funds, said one recruiter who
works with several funds and banks in the commodities industry.
In November, U.S. natural gas futures experienced their most
volatile streak in nine years.
Velite Capital, which emerged earlier this decade as one of
the most profitable natural gas hedge funds, founded by star
trader David Coolidge, began winding down in August.
Madava Asset Management, meanwhile, shut after investor
Blackstone Group requested to pull funds, according to a Wall
Street Journal report.
Timoneer Energy, a hedge fund specializing in natural gas
futures and options, also wound down last year, sources said.
The firm was set up in 2015 by a portfolio manager and three
analysts from Velite. Several former members of the fund did not
respond to a request for comment.
Two years ago, energy executives John James and Sachin Goel
planned to launch natural gas-focused hedge fund Mercasa Energy,
backed by an initial commitment of $10 million from investor
Titan Advisors, which has some $4.5 billion in assets under
management. But the fund was not able to secure additional
investments, and by early 2018, Mercasa had shut.
Titan Advisors declined to comment.
Ernest Scalamandre, founder of AC Investment Management, an
investment firm focused on commodities, said he expects funds
dedicated to oil and natural gas to remain challenged.
"I don't envision the fundamentals changing all that much
for gas and or crude," he said.
(Reporting by Devika Krishna Kumar in New York and Liz Hampton
in Houston
Additional reporting by Jennifer Ablan in New York
Editing by David Gaffen and Brian Thevenot)
First Published: 2019-01-18 08:00:00
Updated 2019-01-18 14:00:00
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