Tuesday, August 19, 2008
If you happen to be in need of Vaseline and find that your local pharmacy is sold out, never fear. Chances are, the entire stock has been purchased by your friendly neighbourhood hedge fund manager. If you ask nicely, perhaps he'll let you borrow a tub or two.
One of the signal trends of the past month or so has been the sharp decline in the oil price. Part of this is likely attributable to the China/global growth slowdown theme that Macro Man has highlighted recently, and part of it is likely a result of some sort of dollar strength feedback loop, which itself is at least partially attributable to a softening of the ECB's rhetoric.
On the face of it, it would appear that the hedge fund world has dodged a bullet in oil. After all, the CFTC data has shown net speculative positioning to be fairly light over the past month or two, and even slightly negative for the last few weeks.
Sadly, that chart doesn't tell the whole story. It would appear that a number of people decided to play the energy patch through the equity space rather than the physical/futures. Shortly before disappearing on holiday, Macro Man observed that the performance of "market neutral" equity hedge funds had been submarined by an apparent addiction to "equity market crack": long energy and short financials.
What he didn't realize at the time is that many of his macro brethren appear to have become ensnared in the same addiction. The chart below shows the "equity crack" trade in red, and the HFR Global Macro NAV index in white. Ouch!
To put recent hedge fund performance in perspective, Macro Man had a look at the monthly returns of the Credit Suisse/Tremont hedge fund index, a broad measure of more than 5000 funds that has tracked hedge fund performance since 1994.
It turns out that last month was the worst month for hedge funds since April 2000, which was the month that the dot-com bubble started to go badly, badly wrong.
Ouch! This perhaps provides some explanation for the recent dollar move; insofar as the hedge fund universe (and, it must be admitted, the real money universe as well) had a long commodity/short USD exposure that has gone seriously wrong recently, perhaps some of the relentless supply in EUR/USD has represented some sort of proxy hedging.
In any event, this dismal performance might explain the run on Vaseline at your local Boots or Duane Reade. If you want to borrow some, however, you'd best call it by its brand name. Any reference to "petroleum" jelly to your local hedge fund manager might get his front door slammed in your face.