August 30, 2004

SUCKER PLAY:

Oil Slips Below $43 a Barrel (Reuters, 8/30/04)

U.S. oil prices fell below $43 on Monday on continued profit-taking as producer-group OPEC eyed increases in the coming months in its tight spare capacity, countering worries over stumbling Iraqi oil exports.

U.S. light crude fell 58 cents to $42.60 a barrel, nearly $7 below a record hit earlier this month as hedge funds unwound their speculative long positions.


What exactly do these hedge funds hedge against since they seem to get markets wrong so often?

Posted by Orrin Judd at August 30, 2004 1:49 PM
Comments

It actually dropped to about $41.65ish today and may close below $42/barrel.
And yet the articles all point to Iraq and other reasons why the price will be climbing again soon.

Posted by: AWW at August 30, 2004 2:09 PM

Mitigating your risk at getting the markets wrong is exactly what hedge funds are for. So whether you thought that oil prices (for example) would rise or fall, you would hedge against either occurence.

Posted by: Brandon at August 30, 2004 2:39 PM

The term is really meaningless, hedge funds are merely investment funds that have the freedom to invest in just about anything, gnerally using gobs of leverage.

OJ, you don't know at what price they went long with their position, so you have no idea whether they made or lost money.

Posted by: Robert Duquette at August 30, 2004 2:48 PM

Um....hedge funds go short too, fellas. That trade (down from $50) looks even smarter than the long at this point.

Posted by: John Resnick at August 30, 2004 3:37 PM

Brandon:

Why not sit it out?

Posted by: oj at August 30, 2004 3:59 PM

OJ, you don't make money by "sitting it out". They look for small market movements that appear to be sure things, such as bond arbitrage, then increase their returns by massive uses of leverage - sometimes 20 times their investment. With bubbles in every other market, this is what the "smart money" is doing to earn a yield on their capital.

Posted by: Robert Duquette at August 30, 2004 4:14 PM

Robert:

Thus my question, why is the smart money so stupid:

http://www.dailytimes.com.pk/default.asp?page=story_29-8-2004_pg5_19

Posted by: oj at August 30, 2004 4:23 PM

The real question, of course, is when do I lock in my fuel oil pricing for this coming winter...

Posted by: mike earl at August 30, 2004 4:41 PM

You don't sit it out because if you guess wrong without hedging, you lose much more money than if you hedge. (Of course, conversely, you don't make as much if you guess right.) Nevertheless, the main idea is to minimize risk and potential exposure, not to make money by speculating.

Posted by: Brandon at August 30, 2004 4:54 PM

Brandon:

Buy those I bonds we issue now. They pay a guaranteed rate over inflation which is already overstated by over 1%.

Posted by: oj at August 30, 2004 4:59 PM

Brandon,
You are talking about the act of hedging, which is what portfolio managers do to protect against reversals. That is not what "hedge" funds do. It is a misnomer.

Posted by: Robert Duquette at August 30, 2004 5:48 PM

Didn't you notice the quotes around "smart money"?

Posted by: Robert Duquette at August 30, 2004 5:53 PM

Crowing that oil prices are only 30 percent above where they were a year ago seems odd to me, unless you own an oil well

Posted by: Harry Eagar at September 1, 2004 10:50 PM

Or oil stocks.

Posted by: oj at September 1, 2004 11:44 PM
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