Bullish on oil, Andurand Commodity Fund Manager Pierre Andurand looks around the world for justification of his long exposure. Since the start of 2017, patience has been emphasized by the famous French oil trader, perhaps best known for his previous BlueGold Global Fund management, who is now struggling with an -11.6% loss year to date as of March and is in the middle of the worst drawdown in the life of the fund, a March investor letter reviewed by ValueWalk reveals.
Pierre Andurand – A hedge fund manager with a strong track record finds himself in an inevitable drawdown
When he started his career at the BlueGold Global Fund, generating on average 60% performance each of the four years he managed it, he had a charmed career. Andurand then ventured out on his own, and his gift for reading the oil markets, judging by numeric performance, revealed an amazing talent.
That talent was confirmed in 2014 when the oil market had its most precarious price drop in history, moving from $108.51 June, 2014 to end that year near $55 per barrel, almost cutting the price of oil in half over the course of just six months. Pierre Andurand caught the end of this trend, delivering investors 38.1% on a year that saw the S&P GSCI Crude index drop by 42.6%.
Andurand’s general beating of the crude oil benchmark, and his noncorrelated switching of positions, is his hallmark. After a strong 2016 when the fund was up 22.1%, Andurand, now with $1.3 billion under management, looks to understand causation for the fund’s recent drawdown, a setback that hits all fund managers at some point, with the exception of Bernie Madoff.
BlueGold Global Fund – Sentiment and non-economic algorithmic players are driving prices lower, says Pierre Andurand
The recent oil market sell-off is not attributable to fundamental changes in the supply and demand equilibrium, the hedge fund’s letter told investors. The issue is more a shift in sentiment, also known as soft data.
“It is possible that the oil market continues to be spooked by the extreme volatility and lack of consistency in high frequency tanker tracking data,” he wrote. “Intra week/month large swings in export/import volumes have been supporting heightened skepticism about the OPEC agreement.”
Andurand isn’t buying the OPEC won’t honor its agreements line, however.
“It is clear to us that OPEC remains committed to the output reduction and based on the latest communication from the cartel,” he wrote, emphasizing a primary point that fundamental supply is going to support prices across several platforms, including US crude and shale production. He had previously predicted the OPEC oil deal and now says that will hold.
He looks at China and cites “market fears” that the “intensity” of Chinese oil buying, where excessive leverage rules the day, “has softened slightly.”
The market sell-off is missing the larger picture, he proclaims.
“Market participants remain extremely focused on micro developments like US crude inventories while the big picture has been telling us a different supply story for quite some time,” he wrote. “In fact, the gradual tightening of crude oil spreads has led to the release of expensive onshore and offshore inventories globally.”
So what could be driving prices lower?
Andurand looks at the algorithmic traders and places blame on their non-economic outlook for the price movements. “Without consistent and significant draws invisible onshore inventories, we remain stuck in a trendless and choppy market with CTA flows eclipsing the gradual improvement in fundamentals,” he wrote, pointing to an oddity.
He is not the only analyst to point to CTAs as being responsible for oil price volatility, but both analysts did not cite available open source data. Typically trend following CTAs enter markets during periods when trends are evident, not during choppy markets. Data is mixed on the subject. Depending on the time frame some oil analysis on CTA signals indicates that the market has not generated signals. Niels Kaastrup-Larson’s Trend Barometer, which measures markets for medium to strong trends, shows indecisive markets. Short term CTAs or proprietary traders might have flipped their positions, but certain mid- to longer- term trend models have not given an indication that the time to take action in a particular market has occurred. It is possible that short-term traders have overwhelmed the market, but there are reliable data points that back up this notion that has not been cited.
When reached and asked to provide a source or data support for the notion that CTA flows were strong in a choppy and trendless market, Andurand through spokesperson John Hamlin declined to comment.
“While the price action year-to-date has proven to be extremely frustrating, our bullish outlook for oil prices has not changed,” he told investors experiencing the largest drawdown in fund history. “We maintain the view that front month oil prices will reach new highs over the next few months as fundamentals improve considerably going into the summer.”
Keep the faith, is Pierre Andurand's message. All great investors endure pain. That’s part of the process.