Hedge funds increasing long energy bets
Oil future prices for Brent rose above USD115/bbl on 19 June, the highest level of the past five years.
This is taking place on the back of a deterioration of the inter-confessional situation in Iraq, supply outages in Libya and an apparent build in China’s crude strategic reserve in April and May.
This environment is triggering a build-up of long energy positions by hedge funds, according to Philippe Ferreira, head of research at Lyxor’s managed account platform.
As a result, CTAs and global macro managers are currently providing a hedge against mounting geopolitical risks in the Middle East. Escalating tensions between Shia and Sunni risk engulfing neighbouring countries such as Syria and Iran and Saudi Arabia and provoke an exponential rise in oil prices.
With regards to recent hedge fund performance, merger arbitrage is leading the pack this week as well as month to date. A widening of spreads is taking place on the back of increasing of M&A activity, which is supporting returns.
The aggregate Lyxor index is down 0.3 per cent this week as risk assets struggled. As a result, L/S equity underperformed other strategies. But merger arbitrageurs proved quite resilient in front of the recent weakness in global equity markets. The strategy is again demonstrating its ability to navigate choppy waters and generate alpha in all circumstances.
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