Hedge funds as an asset class
In this article, Adam Singleton, looks at hedge funds as an asset class.
Most portfolio fund managers will tell you that diversification is the key to successful investing, part of that diversification will include investment in commodities as an asset class. Gold prices may be reaching a 'topping out' point as increasing security is being felt by investors with stock markets recovering. However, oil prices, especially oil futures, have still a major role to play in the recovering economic markets. Oil literally oils the economic wheels and should provide attractive returns for investors willing to get in now.
It took only five months for the price of oil to plummet from $149 to under $30 per barrel in the second part of last year. The price of oil is now about $65, still below its true worth.
In real terms, oil consumption globally has not decreased by more than 10% in the last year. Part of oil big collapse in value is due to hedge funds who had to raise cash by de-leveraging, liquidating their leveraged energy ETF (Exchange Traded Fund) positions, sending the price of oil tumbling. Due to the economic crisis led by the collapse of the banking sector and linked with the suspension by the US Securities Commission disallowing shortage of banking stocks, energy stocks were picked on as an escape route and shorting and ultra shorting of exchange traded funds in oils compounded the downward spiral of price. By the end of 2008 the oil price had collapsed by 75%. Oil prices have now steadily increased to approximately $65 a barrel. Nevertheless, the price of oil is lower than the true production costs, and new exploration projects are being cancelled. China is still pushing ahead and its fast growing economy is hungry for oil (only 3% of the population has a car).
Portfolios that ignore oil will be found lacking and gaining exposure to oil by simply investing in oil companies may prove inconsistent compared with buying exchange traded funds which are directly tied to the oil futures market. In time some analysts believe major quoted oil companies won’t maintain their value – especially once their book reserves become depleted. State owned oil companies (such as Russia, Iran, and Saudi Arabia etc) have the upper hand – these companies control a good 80% of production. It then follows one of the most effective ways to track oil values in the long term will be via ETFs. Oil is the keystone commodity, and once economies stabilize and begin to recover, oil will once again become very highly prized as an asset.
One way or another there is a limited supply of oil and the pressure on price will become an irresistible force.
