The vote by the Organization of the Petroleum Exporting Countries (OPEC) on 27 November 2014 to not reduce oil production levels was widely publicized and had a significant effect on managed futures and CTAs throughout Q4 2014, particularly on funds with a focus on trading oil. Throughout this period, the Brent Crude Oil price index fell by nearly 40%, from $94.80 at the close of September to $57.55 on 31 December. It is clear that the volatility of this commodity provided opportunities for funds implementing short strategies but exposed those unable to navigate the market.
As the chart below illustrates, the cumulative returns of oil trading programs outperformed the Preqin All-Strategies CTA benchmark for seven of the first nine months of the year. This was in spite of a steady and persistent decline in the price of oil that started in June and continued through to the end of the year. However, during the period surrounding the OPEC production decision, oil trading funds fell behind the overall CTA benchmark. October was a difficult month for oil trading programs, losing 2.41% while the wider CTA sector generated just -0.80% for the same period. Notable gains made in November and December were not enough to close the gap and oil trading CTAs ended the year posting +7.41%, more than two percentage points short of the CTA benchmark (+9.50%).
High performing commodity funds saw their short oil positions reap rewards throughout the fourth quarter. Several managers reported double-digit gains in November and specifically cited the OPEC announcement as a key driver of performance. However, those funds that maintained long positions in oil, or called the end of the oil price slump too early, experienced the opposite effect that downward pricing pressures can have on the market. Preqin’s Hedge Fund Analyst database shows that four funds trading oil as a strategy were liquidated during the fourth quarter. Abydos Capital Management’s fund closed shop after the unprecedented decrease in oil value led to the fund’s recent heavy losses, including a net loss of more than 13% in September. The sustained decline of oil prices that followed in Q4 proved contradictory to the belief of the fund manager, which had expected oil securities to make a comeback in the final months of 2014.
OPEC states maintaining levels of oil production and the rise of supply coming from non-OPEC states has generated the surplus of oil currently in the market, wreaking havoc on oil prices across the globe. Those CTAs that attempted to call the bottom of the oil price slump in Q4 have incurred losses as the price of oil has continued to fall during the first weeks of 2015. However, amid continued uncertainty and reports that short positions in the crude oil market hit a long-term high in January, the opportunity remains for strong returns in the commodity markets.