By Barani Krishnan
Investing.com - In the end, the first quarter of 2023 came down to Mother Nature and several bank failures. Depending which side of the trade they were on, the world’s best-known hedge funds were either on a roll or having some of their worst luck ever.
Natural gas had its worst plunge in a three-month stretch due to unseasonably warm winter. Gold had an unprecedented 9% rally for two quarters in a row, thanks to a banking crisis, which almost left oil too with a double-digit quarterly loss that those long crude managed to slash in the final week of March. In 2022, the best performing hedge fund strategies were macro, including the sub-strategies of fundamental commodity, discretionary, and quantitative, trend-following CTAs or Commodity Trading Advisors.
Arguably, last year was an easier one for CTAs. Then, most commodities were one-way trades - going higher and higher - for most of the year (or at least six to nine months) as the Russian invasion of Ukraine upended supply of almost every raw material from oil to wheat and shook up the global economy. It was only in the second half that some measure of supply stability began to appear, resulting in market volatility that trapped some trend-followers on the wrong side.
Despite those late price swings, the HFRI 500 Index, which tracks commodities and runs under the Hedge Fund Research Intelligence banner, broadly outperformed the equity and fixed-income markets and especially technology stocks - by 3,000 basis points, the widest margin since the index's inception.
But this year brought a completely different challenge, one that few CTAs could have anticipated. The banking crisis, which began in the U.S. and quickly grew tentacles in Europe, altered the risk/ return profiles of virtually all major asset classes. Hedge fund managers were forced to adjust their playbook. Those who could do so quickly outperformed managers who were set in their ways. In some cases, smaller funds were nimbler than their larger counterparts, which enabled them to adapt quickly.
Macro funds which lost money might face investor redemptions, Don Steinbrugge, founder and chief executive of Agecroft Partners, said in comments carried by Reuters on Friday. "For people who invest in CTAs, they tend to understand if you have sharp reversals, they are not going to do well staying with them," Steinbrugge said.
Thus, trend-following funds were quicker to bail this year on trades that stopped working, a pension fund director who invests in hedge funds said in the Reuters report. He, however, does not plan to reduce his investment in trend funds because he believes their strategies will work over the year.
Jim Neumann, chief investment officer of alternatives advisory firm Sussex Partners, said many funds were caught off guard in short positions in sovereign debt markets. The blowup in banks caused investors to flee to the safety of bonds, sending yields down at a rate not recorded since the 2008 financial crisis. “The violent swings in the global rates markets took their toll on many discretionary and systematic (CTAs) managers," said Neumann, adding portfolio managers on average cut risk exposure by 50% following the selloff.
Among trend followers, which also profited by betting on higher rates last year, the Tactical Trend fund of the $18 billion Graham Capital Management lost about 10% for the month through Friday, said people familiar with the firm. Stockholm-based Lynx Asset Management’s diversified trend-following strategy, the Lynx Program, also lost roughly 10% for the period.
Famed oil trader Pierre Andurand is, meanwhile, emerging as one of the biggest hedge fund losers this year after the banking crisis sent shock waves through commodities markets. The London-based trader’s flagship Andurand Commodities Discretionary Enhanced Fund has slumped about 40% so far this year, Bloomberg says, citing people with knowledge of the matter. Most of the losses occurred in March, as U.S. crude hit 15-month lows of below $65 per barrel at one point. The flagship fund of Andurand, who manages some $1.4 billion, was down 23% this month through mid-March.
Andurand, who runs the fund with a high-conviction strategy with no set risk limits, has predicted that oil prices may exceed $140 a barrel this year. He has said the recent fall was not backed by fundamentals and all the indicators he uses were getting more bullish. The losses this year are enough to wipe out all of Andurand’s 2020 gains. His fund surged 154% in 2020, 87% in 2021 and 59% in 2022. At one point last year, his fund was up as much as 160% but gave up most of this rise during the second half of the year as the price of oil sank.
He’s among several high-profile hedge fund traders caught out by market movements this year. Said Haidar’s Jupiter macro money pool is down 44% this year following wild bond swings. Billionaire Chris Rokos’ fund has reportedly lost about 10% for the year through mid-February, erasing all gains this year.
Oil: Market Settlements and Activity
Against the odds, oil bulls coasted to a second straight week of gains that sharply pared losses forced by the U.S. banking crisis two weeks ago. Yet, they fell short of turning March into a positive month, and took an even bigger hit for the quarter.
New York-traded West Texas Intermediate, or WTI, crude did a final trade of $75.70 on Friday, as per Investing.com data. It officially settled the session at $75.67, up $1.30, or 1.8%, on the day, after a session high at $75.72 that marked a two-week peak. For the week, WTI was up 9.2%. Combined, the past two weeks slashed 11% off the 13% drop WTI endured three weeks ago. For the month though, the U.S. crude benchmark was off by 1.8%, while for the quarter, it showed a loss of 6%.
London-traded Brent crude did a final trade of $79.94 on Friday, as per Investing.com data. Brent officially settled the session at $79.77, up 50 cents, or 0.6%, on the day. For the week, Brent rose 6.4%. For the month, the global crude benchmark was down almost 5% and for the quarter, it showed a loss of 7.3%.
“Oil prices are continuing to gradually recover but remain way off pre-banking mini-crisis levels,” said Craig Erlam, analyst at online trading platform OANDA. “The prolonged economic scarring of the last month will likely slow the economy, if not cause a recession,” Erlam said, adding that the recovery may be slow as inventors learn of the longer-term consequences from this month’s banking crisis, with lower interest rate expectations unlikely to help much.
Notwithstanding those concerns, this week's gains in oil were supported by bullish demand data on both crude and gasoline.
Crude prices could also see further support next week from a meeting of producer group OPEC+ - which has been orchestrating market support in recent months with words more than the production cuts it promised.
OPEC+ - an alliance of the 13-member Saudi-led Organization of Petroleum Exporting Countries and 10 independent oil producers steered by Russia - is supposed to be practicing a daily output cut of two million barrels. But overproduction by the group is reported commonly, with the refrain being that the market is still balanced.
Headlines out of Moscow last week said Russian crude production fell by 300,000 barrels per day in the first three weeks of March, to 9.78M barrels per day. That was, however, still below the 500,000 bpd cut pledged by the Kremlin.
Russia’s “fire-sale” of its Urals crude - at $60 a barrel or lower, in compliance with Western sanctions related to the Ukraine war - has been cited as one of the reasons for the inability of the oil market to command a constantly high price for WTI and Brent. Major crude buyers such as India and China have sourced cheap supplies from Russia for months now and cut back on pricier supply from other oil producers, including Saudi Arabia.
Oil: WTI Technical Outlook
U.S. crude could reach targets above $80 in the coming week if its momentum holds, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.
“WTI has had a strong rebound with a bullish closing at $75.67, which is inches away from the weekly middle Bollinger Band of $76.55 and the 100-Day SMA of $76.93,” Dixit said, referring to the Simple Moving Average. U.S. crude’s current bullish structure is supported by the 5-Day Exponential Moving Average, or EMA, of $73.75 crossing over to the Daily Middle Bollinger Band of $72.60, Dixit said. Another overlap into the 50-Day EMA of $74.90 would endorse further continuation of ongoing rally, he added.
“Going forward, the weekly Middle Bollinger Band of $76.55 and the 100-Day SMA of $76.93 will be immediate challenges, which may either stop the rally or if decisively cleared, can extend the upward move towards the 5-month EMA of $79,” said Dixit. “In the event the bullish momentum continues above $76.55 - $76.93, we are likely to see more gains in WTI heading towards the major resistance zone of 50-week EMA at $82.66, followed by 100-week SMA at $84.50.”
But on the flip side, if $76.55 - $76.93 attracts oil bears, then a selloff could ensure, pushing prices down, towards $73.50 and the horizontal support of $69.50, before a retest of the 200-week SMA of $66.35, Dixit added.
Natural gas: Market Settlements and Activity
U.S. natural gas prices experienced what appeared to be their biggest plunge in a quarter, handing bulls in the space a loss of more than 50% for the December to March period, as an unusually warm winter led to a huge inventory of the fuel used for heating.
Natural gas for May delivery did a final trade of $2.6125 on Friday, as per Investing.com data. It officially settled the session at $2.216 per mmBtu, or million metric British thermal units, on the New York Mercantile Exchange’s Henry Hub — up 11.2 cents, or 5.3%, on the day. For the week, the benchmark gas contract fell 6% while for the month, it lost 19%. Worst was the quarter, where it tumbled 50%.
The selloff in gas came amid weaker-than-usual demand for heating that has left 1.853 trillion cubic feet, or tcf, of gas in U.S. {ecl-386||storage}}, the Energy Information Administration, or EIA, said in its latest inventory reading for the week ended March 24.
The current U.S. gas storage is 31% higher from the balance at the same time a year ago and 21% up versus the five-year average for storage, the EIA said. The gas balance for 2023 is the highest in recent memory and remains the bane of bulls in the market who’ve been trying to restart a spectacular rally they enjoyed just months ago, before an unusually warm winter season led to less heating demand, sending excess gas supply into storage.
The path forward for gas bulls would be to hope for outsized summer demand that would lead to higher-than-usual storage draws of the fuel for cooling, said analysts. Barring a scorching and long summer, “we still need a decent supply move downward this summer to facilitate balancing this market”, Eric McGuire, analyst at Wood Mackenzie, said in comments carried by naturalgasintel.com.
Natural gas: Price Outlook
Despite consistent pressure below the 5-week EMA, lower lows in natural gas are not really attracting seller enthusiasm, said SKCharting’s Dixit. “The bear reluctance is clearly visible,” he said.
Daily and weekly charts were showing unambiguous divergence on natural gas prices making lower lows and the Relative Strength Index making higher lows, Dixit said. “We may be approaching an end of bearish correction and rebound from the lows may be taking shape soon, to be confirmed as and when the $3.03 high is taken out, clearing the decks for major reversal,” he said. “It is important to understand here that the rebound/reversal requires fulfillment of certain essential price conditions.”
Gold: Market Settlements and Activity
In what appears to be an unprecedented win, gold prices are up 9% for two quarters back-to-back as memory of this month’s U.S. banking crisis keeps the safe haven in demand, even as risk assets rebound from recent lows.
Gold for June delivery on New York’s Comex did a final trade at $1,986.70 an ounce on Friday, as per Investing.com data. It officially settled the last trading day of March at $1,986.20 an ounce, down $11.50, or 0.6%. For the week, the benchmark U.S. gold futures contract was down as well, dipping $15.50, or 0.8%, as it compares with the previous Friday settlement of $2,001.70. But for the month, it climbed 8%, and, more importantly, for the quarter, it had a $160 gain that translated to a near 9% win.
That quarterly gain is particularly significant as Investing.com data indicates that it’s the first time that gold posted such a large quarterly advance back-to-back. In the previous quarter between September and December, gold futures notched a $154, or 9.2% gain.
Adding a cherry to the frosting on the gold cake was the metal’s proximity to the $2,000 perch for much of this month. In the past two weeks, Comex futures have breached $2,000 on six occasions, reinforcing expectations that it will get to $2,100 in due course to set a new record high.
Gold highs came even as the S&P 500 climbed 6% over the past three weeks, shrugging off contagion worries from the U.S. banking crisis that led to the collapse of two banks and the rescue of another amid troubles in the European banking sector as well.
“It's been a very good start to the year for gold and the banking turmoil in March was another very bullish catalyst for it; so much so that it's barely given back any of those gains as interest rate expectations have barely shifted back and yields have remained lower,” said Craig Erlam, analyst at online trading platform OANDA.
The Federal Reserve, which has added 475 basis points to U.S. interest rates through nine rate hikes over the past 13 months, is expected to end the tightening cycle between May and June. The central bank has ruled out any rate cuts for this year, though analysts aren’t exactly sure about that.
Gold: Price Outlook
Gold may be headed for consolidation in the coming week despite the strong monthly and quarterly close, said SKCharting’s Dixit. “Closing $42 below the $2,010 monthly high makes room for ample consolidation against the high and we expect a retest of the 5-week EMA, which may dynamically shift to $1,955.” Dixit said.
He added weakness beneath the $1,960-$19,55 support base will put gold under further pressure, pushing prices down towards the major support zone of $1,932-$1,928. On the flip side, consolidation above $1,960 will help gold retest $1,988-$1,993 and reclaim swing high $2010, Dixit said. “The daily chart shows a pennant formation in the range of $1,934-$2,010 and a sustained break above $1,988-$1,993 will indicate a breakout aiming to reach $2060 initially, followed by $2086.”
Disclaimer: Barani Krishnan does not hold positions in the commodities and securities he writes about.