Oil price rally sees commodity market winning back investors
After losing cash and clients over the last few years, the oil industry has begun to rally and managers are seeking a major uptick in interest from investors.
So far this year, around $5 billion has flowed back into long-suffering commodities hedge funds, with the first three months of the year enjoying the largest inflows of capital since 2009, according to eVestment data. Enticed in by the major gains the sector is currently experiencing, investors are hoping to see the fruits of their decisions in the near future – and with gains of between 12 and 18 per cent recently posted by oil traders including Stuart Zimmer’s New York-based ZP Energy Fund and Pierre Andurand’s $1.1 billion London-based Commodities Master Fund, this is looking to be more and more of a likely prospect.
According to Michele Gesualdi, the chief investment officer for hedge-fund investing at Kairos Partners, “funds that survived a significant fall in the oil price and in most commodities are clearly real hedge funds”.
“There are not many funds operating in this asset class and some of them are extremely volatile,” Gesualdi added.
The price tag on a barrel of crude oil is rising to around the $50 mark, having slipped as low as $26 in February of this year, and many investors feel that the growing US economy looks set to spur further growth over the rest of this year and beyond. The economy also looks promising for other commodities, such as gold, which has already enjoyed growth of around 14 per cent this year, while soybeans also rose by 24 per cent. In short, global growth is expected for the commodities sector as a whole, Citigroup Inc reported this week, with commodity prices looking unlikely to return to the lows seen of late.
All of this is positive for the commodities market, which has suffered so much in recent years, with outflows of around $6.2 billion seen by commodity fund managers between 2012 and 2014, a loss so great it forced out many of the sector’s key players. Some of the most telling events were the closing of funds including Higgs Capital Management and Clive Capital LLP, and overall more than 12 asset managers closed funds.
In stark contrast, new startups are now coming out of the woodwork. One fund manager, Luke Sadrian, told Bloomberg that he planned to open up a new commodities fund in London off the back of the growth in the sector. His new firm, which will be called Commodities World Capital, will trade on all commodities and Mr Sadrian himself predicts oil prices will continue to rise. “Even from these new higher prices, we see 20 per cent to 40 per cent upside in crude oil,” he told the publication.
According to eVestment, average returns for commodities-focused hedge funds were about six per cent over the first quarter of this year, following on from a loss of 10.4 per cent over the course of 2015. Around $70.5 billion was being managed by almost 300 such hedge funds at the end of March 2016, eVestment said, which represented a major rise from the $65.4 billion that they were managing at the end of 2015, which was a six-year low.
A recent report from Goldman Sachs found that oversupply in the oil market has now come to an end as a result of “sustained strong demand as well as sharply declining production,” and this also looks set to help drive up prices.
However, investors need to remain cautious in a market where several players including Saudi Arabia and Russia are ramping up output and global demand for oil is yet to demonstrate any significant positive trend.