Will Hedge Funds Take A Bath In Oil?

Date: Wednesday, January 10, 2007
Author: Hedge Fund Daily

There’s rumbling that hedge funds may get hit hard in the energy sector – again -- if oil prices continue to slide. Oil prices are hovering around $55, dropping nearly 12% since the beginning of the year, thanks to a spring-like winter in the Northeast, and there’s concern that hedge funds may end up taking a bath in oil, in the same way that natural-gas caused many billions in losses last year. "Weather is certainly a key driver of sentiment, but what has been set in motion is a far more general demand pessimism for the year ahead," Barclays said in a recent interview with Scotsman.com. And it’s not only oil but other commodities. "This has produced a market that is more sensitive than usual to any producer hedging, and which is inclined to attempt to break sharply lower." Meanwhile, the New York Post reports that the weather may not be the only reason oil prices are so low. Goldman Sachs reportedly cut back by 50% its exposure to oil for the year in some of the subindices in the Goldman Sachs Commodity Index and that can have an impact on investments. "If Goldman’s model tells them [institutional investors] to cut their energy exposure by half, they do it," Warren Mosler, president and chief investment strategist at hedge fund Valence Corp. told the Post. Hedge funds are hoping Goldman’s move won’t result in repeat of last year when it eliminated a Nymex unleaded-gasoline contract and gas prices plunged, causing big losses at a number of hedge funds.