CF Partners Capital Management, a London-based energy-focused hedge fund, is betting on a continued price recovery in energy markets heading into the second half of 2020.
CF Partners Capital Management, a London-based energy-focused hedge fund, is betting on a continued price recovery in energy markets heading into the second half of 2020.
Portfolio manager and chief investment officer Elvis Pellumbi, who launched the firm’s long/short event driven equity fund CFP Opportunity in 2015, said the commodity will continue to outperform equity markets following its recent price rally, and is positioning the strategy accordingly.
The USD400 million firm’s CFP Opportunity Fund, which invests across oil, gas and renewables equities and credit, gained close to 6 per cent in May, and is estimated to be up almost 25 per cent so far this year.
Commodities-focused hedge funds have flourished recently, in light of the dramatic price volatility seen in oil markets during 2020.
“Our focus has very much shifted on renewables plays on the long side as the market is not rewarding fossil fuel names in the same way,” the commodities market veteran told Hedgeweek on Friday (12 June). “We intend to keep that focus and keep growing it.”
Oil prices have approached a three-month high in early June following a sustained price rally last month, with both the Brent crude and West Texas Intermediate (WTI) benchmarks up to around the USD35-40 level. The rise comes after oil suffered an historic price collapse in April, with the May 2020 WTI futures price falling into negative territory for the first time ever.
Pellumbi acknowledged the “quite violent” oil price moves this year, but added this is “not unusual” given the proportion of speculators in the market, particularly retail investors through ETFs.
“I think the oil market moves higher from here on the back of underinvestment and global demand surprising to the upside,” Pellumbi said. “It’s difficult to pinpoint how high WTI and Brent go but they usually tend to overshoot fundamentals.
“I think the commodity will continue to outperform equities and that’s how I am positioned.”
The CFP Opportunity Fund trades energy-related equities and credit globally, focusing on liquid mid-cap companies sized between USD500 million and USD3 billion, listed in London, New York and Oslo, which Pellumbi sees as the main markets for energy companies.
It uses a fundamental long/short event-driven investment approach, coupled with a top-down macro perspective on commodity prices, with positions taken in subsectors such as exploration and production, shipping, rigging and drilling firms.
“A lot of the move in oil-related equities, especially in the US, is not in high quality companies that are trading cheap, but rather in bankrupt companies where retail, algos and ETFs will definitely lose their money,” he told Hedgeweek on Friday.
He pointed to one US company which recently filed for a Chapter 11 bankruptcy, whose equity is trading at 30-40 times the valuation implied by its bonds, along with another firm that missed its bond coupon yet whose shares have risen between three and four times this month.
“Those are guaranteed to lose 90-100 per cent of the value and then investors will yet again be disappointed by energy equities.”
