Black box hedge funds lead winners from oil collapse

Tue Dec 22, 2015 11:38am EST
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By Simon Jessop and Barani Krishnan

LONDON/NEW YORK (Reuters) - To make money from the sharp fall in oil prices this year, it helped if you weren't human.

While a handful of big name traders have profited from some of oil's 35 percent plunge, it has been computer-based or "systematic" funds which have captured much of the spoils.

These black box funds use programs to follow various asset classes and look to latch on to market trends. So after crude lost 46 percent in 2014, they were already betting strongly at the start of this year that the trend would continue, largely through oil futures and other energy derivatives markets.

Apart from a modest recovery early this year, crude prices have mostly been a one-way bet and now languish 66 percent below their levels around $115 a barrel 18 months ago.

"The main beneficiaries have been the systematic, or trend-following guys," said Anthony Lawler, head of portfolio management at investor GAM. "The stronger the trend, the bigger the position ... Since the middle of 2014, oil's been trending lower, so that's quite a long trend. As a result, they have meaningful exposure in energy."

By the laws of economics, the oil market will turn back up at some point and trend-following funds may struggle then. But in the meantime, some are producing impressive returns. Millburn Commodity Program, for instance, was up 25.3 percent in the year to Dec. 15, performance data seen by Reuters showed.

"Discretionary" funds - those where a living person pushes the trading button - can come into their own when the market turns.

But Lawler said they typically cut their negative bets when crude fell below $40 a barrel this month, believing the market had hit its floor. Instead it kept falling to around $36 on Tuesday, showing how hard it is for flesh-and-blood traders to get their timing right in a rumor-fueled market.   Continued...

A gas nozzle is used to pump petrol at a station in New York February 22, 2011. 
REUTERS/Shannon Stapleton