Mukul Munish \June 7th, 2004

A number of hedge funds made money in the recent spike in crude oil prices, say market insiders.

The much riskier version of the hedge funds, macro and managed futures hedge funds, had long positions in oil derivatives, and have made a killing in the recent oil price upsurge.

On Wednesday, United States light crude traded at US$42.45 (HK$331.11) per barrel, its highest level in 21 years of New York oil futures trading.

The violence in oil-rich Saudi Arabia at the end of last month caused a one-day 6 per cent spike on Tuesday as analysts began to focus on the possible effects of terrorist attacks on Saudi oil supplies.

According to strategists in Hong Kong and London, the number of long positions in Nymex oil contracts had jumped substantially last month, after a sell-off in April that coincided with hedge funds unwinding their positions from highly leveraged trades.

``Fund managers have a sharp sense of where to make a killing and oil futures have been a good target, after the licking they got in betting against the US dollar and emerging markets,'' a market insider said.

The volatility in Asian markets in April and May have hit hedge funds hard.

According to Hedge Funds World Asia, losses in some quantitative hedge funds dealing in long-term directional trends lost as much as 4 per cent to 8 per cent in April alone.

Aspect, a US$3.8 billion fund that uses statistical models to trade on long-term trends, said its flagship US$940 million fund lost 7.7 per cent as the US dollar began its rally.

A Hong Kong-based strategist said a couple of big hedge funds had accumulated long speculative positions on commodities and equity futures in New York and in Asian markets, and the sharp rise in oil was a signal for them to unwind those positions.

``These funds are looking at weak links to make a quick profit, so they short the market and make money and take long positions and make money. No one can do anything about it,'' he said.

However, one London-based strategist said these funds were not solely responsible for the recent rise in Nymex crude futures to their highest point in over two decades.

``I would say that some speculators may have added as much as US$10 per barrel based on their long positions and hedge funds should not shoulder the blame,'' he said. Crude oil began futures trading on the Nymex in 1983.

Crude oil futures in New York ended 5.6 per cent lower over the weekend reversing Tuesday's record-breaking rally, as key members of the Organisation of Petroleum Exporting Countries said they were resolved to increasing output.

Analysts say barring another terror attack in the Middle East, prices should hover around US$35-US$39 per barrel.