August 30, 2004
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
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.
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.
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.
Um....hedge funds go short too, fellas. That trade (down from $50) looks even smarter than the long at this point.
Why not sit it out?
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.
The real question, of course, is when do I lock in my fuel oil pricing for this coming winter...
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.
Buy those I bonds we issue now. They pay a guaranteed rate over inflation which is already overstated by over 1%.
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.
Didn't you notice the quotes around "smart money"?
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