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Black Box Hedge Funds Lead Winners from Oil Collapse

News Items

Black Box Hedge Funds Lead Winners from Oil Collapse

Craig Gilbert

Reuters Article, Published December 23, 2015
Article republished with permission of Reuters
By Simon Jessop and Barani Krishnan

  • Millburn Commodity Program up 25.3¹ pct this year - performance data
  • Among 'human' funds, Taylor Woods the best, up 20 pct
  • Andy Hall's Astenbeck a big loser, down more than 20 pct

LONDON/NEW YORK, Dec 22 (Reuters) - To make money from the sharp fall in oil prices this year, it helped if you weren't human.

While a handful of big name traders have profited from some of oil's 35 percent plunge, it has been computer-based or "systematic" funds which have captured much of the spoils.

These black box funds use programmes to follow various asset classes and look to latch on to market trends. So after crude lost 46 percent in 2014, they were already betting strongly at the start of this year that the trend would continue, largely through oil futures and other energy derivatives markets.

Apart from a modest recovery early this year, crude prices have mostly been a one-way bet and now languish 66 percent below their levels around $115 a barrel 18 months ago.

"The main beneficiaries have been the systematic, or trend-following guys," said Anthony Lawler, head of portfolio management at investor GAM. "The stronger the trend, the bigger the position ... Since the middle of 2014, oil's been trending lower, so that's quite a long trend. As a result, they have meaningful exposure in energy."

By the laws of economics, the oil market will turn back up at some point and trend-following funds may struggle then. But in the meantime, some are producing impressive returns. Millburn Commodity Program, for instance, was up 25.3 percent in the year to Dec. 15, performance data seen by Reuters showed.

"Discretionary" funds - those where a living person pushes the trading button - can come into their own when the market turns.

But Lawler said they typically cut their negative bets when crude fell below $40 a barrel this month, believing the market had hit its floor. Instead it kept falling to around $36 on Tuesday, showing how hard it is for flesh-and-blood traders to get their timing right in a rumour-fuelled market.

The fall has hit funds of all stripes holding energy stocks and debt, and buoyed those which invest in firms that are large consumers of energy and have therefore benefited through lower costs. Energy-focused discretionary funds have been the purest play on the move, and their performances vary considerably.

Taylor Woods Capital, for example, rode the oil market down for a third straight year of double-digit percentage gains and its best since 2013. However, oil trader Andy Hall's Astenbeck Capital Management stands to lose hundreds of millions of dollars from his so far failed bet on a crude price recovery.

On average, energy-focused hedge funds have risen 3.6 percent in the year to November, trumping their commodity peers which have fallen 2.4 percent, HFR data showed. The average fund of any strategy, meanwhile, is up 0.3 percent.

WINNERS, LOSERS

Taylor Woods, run by former Credit Suisse traders Beau Taylor and Trevor Woods, posted a 20 percent gain in the year to mid-December. The Greenwich, Connecticut-based hedge fund started the year with about $1 billion in assets and could make $200 million in profit if it maintains its performance to the end of the year, people familiar with its funding and returns said.

Investors stuck by the fund even when crude prices unexpectedly jumped 25 percent in April during the short-lived rally. "They had low volatility in some of the most challenging times," an industry source said, noting withdrawals that month had been a relatively modest 5 percent of the total sum invested. "That sort of risk management was rare this year."

Taylor Woods declined comment when contacted by Reuters.

Just behind lies the $615 million London-based Andurand Capital, run by former Vitol oil trader Pierre Andurand, which is up 8 percent in the year to Dec. 11.

Andurand - who achieved a return of 210 percent in 2008 after correctly calling an oil price jump and subsequent collapse - told investors recently that crude may fall below $25 in the first quarter of next year, and he was using options to benefit from the move.

Andy Hall has been one of the most successful fund managers of the last decade but this year Astenbeck is among the worst performers. The fund, based in Southport, Connecticut, lost 26 percent in the year to November as he stuck to his conviction that oil prices would recover.

This year's decline is the largest ever for Astenbeck, which manages more than $2 billion and was launched by Hall in 2008. Its biggest annual drop before this was 8 percent in 2013.

Hall did not respond to requests for comment. But in a letter to investors earlier this month he refused to back down from his conviction.

"There is certainly still a chance of lower prices in the next month or so, but weighing that possibility against the virtual inevitability of higher prices down the road leads to a simple conclusion: now is not the time to exit the market".

Other laggards include New York-based BBL Commodities, down more than 10 percent in the year to November after beginning the year with more than $550 million, market sources said.

Run by ex-Goldman Sachs trader Jonathan Goldberg, it was one of the best performing energy funds in 2014, gaining 51 percent.

Goldberg declined comment.

London-based Merchant Commodity Fund has also failed to maintain its strong 2014 performance. It lost 8 percent up to November, after a near 60 percent gain in 2014.

Assets at Merchant declined from nearly $290 million in January to around $210 million, a note circulated by the fund to investors and seen by Reuters showed. (editing by David Stamp)

NOTES AND DISCLAIMERS

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE POTENTIAL FOR PROFIT IS ACCOMPANIED BY THE RISK OF LOSS.

RISKS OF AN INVESTMENT IN MILLBURN COMMODITY PROGRAM (the “Strategy”) include but are not limited to the following: (i)  The Strategy is speculative.  Investors may lose all or a substantial portion of their investment in the Strategy; (ii) The Strategy is leveraged.  The Strategy will acquire positions with a face amount of as much as six to eight times or more of its total equity.  Leverage magnifies the impact of both profit and loss; (iii)  The performance of the Strategy is expected to be volatile. Since inception, monthly returns in the Strategy ranged from up 16.65% to down 7.09%; (iv) Investors will sustain losses if the Strategy is unable to generate sufficient trading profits and interest income to offset its fees and expenses; (v) A lack of liquidity in the markets in which the Strategy trades could make it impossible for the Strategy to realize profits or limit losses; (vi)  A substantial portion of the trades executed for the Strategy take place on foreign exchanges.  No U.S. regulatory authority or exchange has the power to compel the enforcement of the rules of a foreign board of trade or any applicable foreign laws.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Millburn Ridgefield Corporation, its affiliates or its employees. The information above is based on performance and other data available as of the date of this article or as otherwise noted. Any markets, models, leverage, portfolio weights and other data described herein change over time, but are accurate as of the date indicated herein. This article reprint is not an invitation to invest in any investment strategy managed by Millburn Ridgefield Corporation (“Millburn”) and must be supplemented by certain disclosure when considering an investment, including important information concerning risk factors, conflicts of interest and other material aspects of an investment; this must be read carefully before any decision whether to invest is made. Investors may lose all or a substantial amount of their investments.

The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Diversification does not eliminate the risk of experiencing investment losses. The information contained herein is intended for use by sophisticated investors who may be interested in opening a separately managed account. Prospective managed account clients must be "qualified eligible persons" within the meaning of CFTC Rule 4.7. Futures accounts are speculative, employ significant leverage, involve a high degree of risk, are not suitable for all investors, and may involve high fees. There can be no assurance that an investment strategy will achieve its objectives. This information is not a solicitation for investment. Such an investment may only be made on the basis of information and representations made in the appropriate written disclosure document.

¹Returns described herein are net of all fees, expenses and transaction costs typically incurred in a separately managed account trading the Strategy (2% per annum management fee; actual transaction costs incurred; 0.25% per annum ordinary operating and administrative expenses; 20% annual profit share, subject to a high water mark), and reflect the reinvestment of profits.