Energy hedge funds make money while oil plunges

January 28th, 2016



December’s plunge in oil prices has dragged down much of the energy sector with it.


However, some energy-focused hedge funds managed to avoid the struggle entirely and have profited recently.


Lansdowne Partners, one of Europe’s largest hedge funds with $22 billion, gained 14.8 percent last year in its energy-focused equity fund, according to Bloomberg.


In December, Lansdowne Partners posted gains of more than 25 percent.


For being a fairly new company, breaking even in the short run was an achievement last year.


While newer energy companies are gradually earning a profit, the price of a barrel of oil dropped 30 percent and the Standard & Poor’s 500 Energy Sector Index lost 21 percent.


Energy-focused equity funds fell nearly 10.7 percent last year, according to The New York Times.


Oil has fallen about another 21 percent in early weeks of 2016, trading below $30 for the first time since 2003.

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The energy sector had a few strong performers despite the overall turmoil.


Landsdowne has succeeded by obtaining majority of its gains from short-run positions.


Bloomberg reported that other key drivers at the $140 million fund, were long and short bets on utilities, energy infrastructure and renewables.


In the United States, Brenham Capital Management, a Dallas, Texas-based equity hedge fund run by John Labanowski, gained 23.2 percent last year, according to an investor from Bloomberg.


The $824 million fund focuses on small and mid-cap energy stocks.


Refinery stocks were a relative bright spot over the past year, though they were hit hard by the U.S.’s lifting of the crude export ban.


Many investors have said the end of the ban will eat away at U.S. refiner’s access to cheaper oil.


The McGinnis MLP and Energy Fund, which was focused primarily on refinery stocks, ended the year up 1.4 percent after a 10.4 percent plunge in December and wiped out most of the year’s gains.


One of the most profitable strategies during this struggle being used by some energy companies has been to bet against the price of oil and other commodities.


Since global supplies will continue to grow while global demand growth will slow, it could result in significantly lower crude prices than seen before.


Shorting strategies helped some commodity trading advisers post double-digit returns last year.


According to The Washington Post, the companies had half of last year’s profits being generated by short run positions in energy futures such as crude oil, natural gas, gasoline and heating oil.


So far in 2016, certain models are forecasting continued near-term declines for crude and the other devices within the energy sector.


Although it is important to note that these models can be quick to adjust when current conditions have been altered such as the environment.


The betting against energy and their stocks is temporary, according to The New York Times.


Eventually, once the market settles down, companies and stockholders can have opportunities to capitalize on one of the largest sectors in the world economy.


Editor’s Note: Information from Bloomberg, The New York Times and The Washington Post was used in this report.