Trader Talk

Hedge funds feel the pain, particularly in energy

Oil slump: Hitting the hedges

There is a lot of pain in hedge-fund land. Imagine how these guys feel. First, they have underperformed all year because most funds run a book of long stocks versus a book of short stocks. Because shorts have underperformed most of the year, they have underperformed the market. Again.

Now, they are getting killed because of how they are positioned: 1) long U.S. market, and 2) long growth stocks.

Growth has gotten hit hard: Semis (XSD) down 15 percent this month, Internet (FDN) and Biotech (IBB) down 7 percent.

But a particularly painful example is energy. The Street has been heavily involved in exploration and production stocks, particularly smaller-cap shale plays, which have been dramatically growing earnings.

The SPDR Oil & Gas Exploration ETF (XOP), a basket of E&P stocks, is down 20 percent this month. Despite the dramatic drop in crude today--down 4.5 percent today--the XOP is down a bit more than 1 percent. That's at least an attempt to buy a bottom.

I don't want to blame the drops on hedge funds selling--they are, undoubtedly, but it's also likely some open-ended mutual funds and some energy ETFs getting redemptions.

On a day when some of the most oversold sectors of the market are bouncing, energy stocks are split, but one sector of energy is notably weaker again: Master Limited Partnerships (MLPs), most of which are involved in the transportation part of the oil and gas business. They own the pipelines and terminals.

Big names like Phillips 66 Partners (PSXP), Plains All American Pipeline (PAA), and Kinder Morgan Energy Partner (KMP) are weaker again today after a very rough couple weeks. PSXP, for instance, is down 18 percent this month. The Alerian MLP ETF, a basket of MLPs, is down about 10 percent for the month.

Interestingly, many of the MLPs bottomed at 10:30 a.m. ET, which is roughly when crude bottomed. It's possible margin calls in commodities precipitated selling in the stocks.

And what about the free-fall in oil? IEA is talking about lower demand, following the IMF. On the supply side, comments out of Saudi Arabia--indicating they are comfortable with oil in the $80-$90 range--is a clear ploy to get everyone on boat with cutting production. Venezuela is already complaining; other OPEC members will undoubtedly start complaining, and we will likely see some kind of production cut in the future.

What's odd is we have not heard anything for many of the companies about future business. Nothing from any of the shale companies on when they are profitable or not. Nothing about capital expenditures. Nothing from oil service companies about how their business will be affected if oil stays at, say, $80.

Partly, this is because it is still too early to tell. But other investors are not waiting.

There is big time pain among small companies in the oil services space. Take C&J Energy, which was $30 two weeks ago, $19 today. Take Basic Energy (BAS) was $22 two weeks ago, now $12.

A lot of these oil service companies have expensive equipment that is not going to be utilized in 2015 if we don't get a bounce.