Oil prices rebounded after some of the biggest names in the hedge-fund world and private equity lost billions betting on a rebound in energy prices and distressed energy debt. What’s more, many of them are staying with it.
The Wall Street Journal is reporting on an issue that many who follow the energy sector already know. The double dip sell off in energy not only caught energy industry veterans by surprise but also hedge funds and private equity. The Journal called it, “The trade that was supposed to carry the year is ruining it instead.” They reported that hedge-fund and private-equity managers over the past year began piling into debt issued by troubled energy companies, hoping to profit off a reversal of oil’s slide. They raised billions of dollars for the effort, in many cases telling backers it was a once-in-a-generation chance to pounce. But crude has continued to fall, slamming the companies and many large investors who thought they had bought in near the bottom.”
The Journal mentions names like David Einhorn’s Greenlight Capital Inc., Carlyle co-founder David Rubenstein and firms like Blackstone (N:BX) and Magnetar Capital LLC.
The Wall Street Journal says that hedge funds that primarily invest in distressed assets are down 4% on average this year, while hedge funds that focus on fixed-income investments are flat overall, according to researcher HFR. Both have lost money in each of the past four months. The Barclays (L:BARC) Capital Government/Credit Bond Index is up 1% this year.
They also say that It has been a particularly harsh stretch for a handful of managers who specialize in complicated debt trades and tout their ability to be ballasts for investors in a variety of macro-economic environments. The largest fund, a junk-bond-focused Phoenix Investment Adviser LLC, declined 24% through the end of August, according to investor documents. The $1.2 billion firm has posted losses in 11 of the past 12 months, the documents show. The firm told investors some of its biggest losses have come from the bonds of oil and gas producer Goodrich Petroleum Corporation (N:GDP). “The whole market was totally flooded,” Phoenix founder Jeffrey Peskind said in an interview.
Even King Street, one of the steadiest performers in the hedge-fund world, has lost money for five consecutive months, according to people familiar with the matter. King Street has been weighed down by one of its largest holdings, bankrupt Texas utility Energy Future Holdings Corp.
Despite the losses, many investors aren’t changing course. Mr. Peskind said he views the sustained pullback as an “unbelievable potential buying opportunity” given the overall strength of the U.S. economy. The Journal goes on to say that in March, Carlyle co-founder David Rubenstein said at a conference that he was looking to “buy now” on the theory that prices would rebound.
Such wagers haven’t panned out, at least not so far. Crude oil traded on the New York Mercantile Exchange has dropped 45% in the past year and is off 14% in 2015, as questions about China’s economic growth have weighed on commodity prices. Meanwhile, the market for junk-rated energy debt has dried up. In the third quarter, the volume of such bonds in the U.S. issued by energy companies fell to the lowest level since 2011.
Still many are saying to stay with the trade. In the meantime oil prices are shaking off weak Chinese data and Iranian oil production boasts and will try to recover ahead of the American Petroleum Institute report!
AAA reports that the national average price for regular unleaded gasoline has fallen for 10 consecutive days, as of yesterday at a national average of $2.26 per gallon. This has not been seen since February 2015 and represents a savings of 55 cents per gallon compared to the 2015 peak price of $2.80 (June 15). Drivers are saving six cents per gallon week-over-week and four cents per gallon month-over-month. Significant yearly savings persist and the national average is discounted by 86 cents per gallon from this same date last year.