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Oil Funds Hold Down Risk, Eye Volatility After Weak First Half

Aramco Oil Refinery, Saudi ArabiaAramco Oil Refinery, Saudi Arabia

Oil’s big rebound in the first half of the year was a squandered opportunity for most hedge funds with positions in crude, and a surge in volatility is likely to make it harder for them to call the market in the second half.

The majority of hedge funds in the oil universe posted sparse returns in the six months to June even as crude rebounded from 12-year lows to post a 30% gain.

Rather than extend risk through more bets on oil, some fund managers are cutting exposure to prevent further losses as volatility rises again on concerns about supply and economic demand.

“It’s far less clear a position than it was a year ago when the oil market had been clearly trending downwards,” said Chris Reeve, director of product management at Aspect Capital, a $6.4 billion trend-following hedge fund in London.

Aspect’s flagship program, which trades oil among other commodities, was down 2.5% through June, based on data seen by Reuters. Last year, it gained nearly 8%, helped by a bearish bet on crude.

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The average hedge fund with an energy-biased strategy rose by just 0.4% in the five months through May, after losing 1% in 2015, according to figures compiled by Chicago-based Hedge Fund Research. June data isn’t available yet.

Trend-following energy funds—also known as commodity trading advisor funds, or CTAs—haven’t done much better. A group of 13 such funds rose 0.6% through May, versus an 8% rise last year, according to data compiled for Reuters by hedge fund database BarclayHedge.

The second half could be as difficult for oil-focused funds. After touching a 2016 high of nearly $53 a barrel, oil has been trading in a choppy fashion, with volatility of late due to a murky supply-demand picture for crude and unsure economic outlook after Britain’s exit from the European Union.

Oil’s rebound this year was fueled by supply outages from Canada to Nigeria that, for a time, created the perception that a two-year-old supply glut might be easing. Those supplies are returning, boosting output within and outside OPEC.

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Hedge funds’ bullish bets on U.S. crude hit a near four-month low earlier this week, data showed.

Pierre Andurand, another notable oil investor, who is up double digits this year, in a late June letter to his investors cited concerns over Brexit among other factors that could cause more volatility.

Andurand, who runs the $1.1 billion London-based Andurand Capital Management, expects crude to hit $65 a barrel or more by December. His fund gained 11% through June, data showed. Andurand Capital declined comment in an email to Reuters.

Oil’s volatility hit 4-month highs on Thursday as crude prices plunged 5% on disappointing U.S. inventory data.

BBL Commodities Value Fund in New York is among the few that may benefit from such volatility. The $500 million energy-focused hedge fund gained 13% in the first half, exploiting the relative value, or price differentials between crude and other petroleum products. Last year, BBL lost more than 10%.

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“There could be lots of opportunities to make money on the relative value of oil in the second half,” said an investor in BBL, who asked not to be identified, adding that large inflows into oil via ETFs have distorted its value compared with other products. Mark Strachan, a spokesman for BBL, declined comment.

The $1 billion Taylor Woods Capital Management in Greenwich, Connecticut, another prominent energy-focused fund, was down about 10% through June, after returning nearly 20% last year, sources familiar with the fund’s performance said.

Taylor Woods did not respond to emails and phone calls seeking comment.

The share price of U.S. Oil Fund, the largest exchange-traded fund in oil, with $3.2 billion in assets, is down slightly on the year after hitting 6-month highs in early June. The number of open put contracts—which give the holder the right to sell the fund—has risen 30% since mid-January, suggesting increasing bets on oil’s decline.

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The ETF holds around 68 million barrels of oil, nearly 4% of U.S. crude’s open interest, and is a popular hedging instrument.

One of the few hedge fund managers to make significant money off oil in the first half was Andy Hall, the market’s biggest bull, who was up 24% through May at his $2.4 billion Southport, Connecticut-based Astenbeck Capital Management. But that was after a 35% loss in 2015, the worst in the fund’s eight-year history, as he stubbornly stuck to his bullish wagers amid a 46% price rout.

In his investor letter last month, he pinned his bullish outlook on potential difficulties faced by top crude exporter Saudi Arabia in raising output.