Lucrative Energy Betting: How Hedge Funds Earn Millions From Oil, Gas, and Nuclear Investments

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Exxon Mobil oil production in Lower Saxony:

Oil and gas stocks have brought hedge funds strong returns over the past few months

Photo: Julian Stratenschulte / dpa

Hedge fund billionaire

(55) would probably like to be a shining example for his industry. As the founder of the investment company The Children's Investment Fund Management (TCI), whose proceeds largely benefit children who live in poverty, Mockery is a kind of do-gooder in the financial business. During these days, the activist investor wrote to the Bank of England, the European Central Bank (ECB) and various other institutions in the banking industry around the world. His demand: financial institutions should pay more attention to climate protection when granting loans - and if in doubt be forced to do so by regulators.

Hohn has already appeared successfully as a climate fighter.

And his concern with the money industry appears to be well founded: According to the "Financial Times", banks around the world granted loans totaling 750 billion dollars to companies in the coal, oil and gas industries last year.

Mockery is by no means the only representative of the hedge fund industry who is committed to a good - green - cause.

In the summer of this year, the comparatively small US investment firm Engine No.

1 for headlines when she managed to get three seats on the board of directors of US oil giant Exxon Mobil.

The declared goal of the engine activists: Exxon should take on the global climate problem and reduce its carbon footprint.

Last fall, the activist hedge fund Bluebell Capital Partners began a campaign aimed at persuading the chemical company Solvay to stop dumping chemical waste from a factory in Italy into the sea there. A year later, Bluebell does not give up - and a few weeks ago demanded the departure of Solvay boss

(52) because she still had not eliminated the problem.

These are just a few examples, and more and more hedge funds are appearing that explicitly promote sustainable investing based on so-called ESG criteria ("ESG" stands for "Environmental, Social and Governance" and has become the abbreviation for sustainability in the Investment industry established).

The sustainability trend, which has gripped the entire investment market for some time, has apparently also reached what is possibly the toughest part of the financial industry, the hedge funds.

Recognize opportunities where others do not want to see them

But that's only part of the truth. The other is: Hedge funds have apparently collected as much money since the beginning of the Corona crisis as they have not in a long time - and the investment houses have invested a large part of it in the industry that makes the greatest contribution to environmental pollution and climate change: global oil - and gas companies.

The total capital of hedge funds has grown by more than one trillion US dollars to almost four trillion US dollars since the outbreak of the corona crisis, has calculated the investment company Bantleon with reference to data from the analysis company Hedge Fund Research. At the same time, the funds put in a strong performance during the pandemic: According to data from LCH Investments, the 20 best hedge funds in the Corona year 2020 achieved revenues of 63.5 billion dollars - the highest value in ten years.

Bantleon portfolio manager Oliver Scharping is not surprised by the good performance of the hedge funds in times of crisis.

The more difficult the environment, the better the funds can play to their strengths, he writes in a market assessment.

For many hedge fund managers this means: Recognizing investment opportunities where others do not see them - or do not want to see them.

During the Corona crisis, many hedge funds recognized these opportunities in the oil and gas industry.

Oil prices have been plummeting for some time and hit an extreme low in mid-2020.

A barrel of crude oil cost less than $ 30 at the time, something that hadn't been around since the early 2000s.

The share prices of oil companies such as Exxon Mobil and Royal Dutch Shell had also slipped significantly.

Investors leave "fantastic returns" behind

A scenario that must have seemed highly risky to many lay investors, and which in any case offered no incentive for investors with a focus on sustainability: Oil and gas companies are among the absolute no-gos for many green investors.

But not for much of the hedge fund industry. The investment professionals from London, New York and other financial centers took hold of it - and have already made a good cut with their oil and gas investments. In doing so, the hedge fund leaders not only ignored ecological concerns and concerns about climate change, which are now widespread within the financial market. On the contrary, they even benefited from this reluctance of the competition. Because many investors are now avoiding oil and gas stocks with a view to ESG aspects, they are also weakening their stock prices - a hit for savvy hedge fund professionals.

Proof of this is provided by the climate activist group DivestInvest, which has set itself the goal of keeping investors out of involvement in the fossil energy segment. The group already has commitments from more than 1,300 investors who represent assets under management of 14.5 trillion dollars, writes the "FT" - they all vow to sell shares in oil, gas or coal companies.

(62), founder of the London hedge fund Odey Asset Management, told the Financial Times

recently about the opportunities that this creates for hedge funds

.

"It's such a great and simple idea," he said.

"They (

) are so determined to get rid of oil assets that they are leaving fantastic returns on the table."

According to "FT", Odey's company has invested in the Norwegian oil company Aker BP and in the Asian Jadestone Energy in recent months.

The manager's funds are up by more than 100 percent so far in 2021, according to the newspaper.

Hedge funds show good timing

Odey Asset Management is by no means the only investment company that showed good timing when entering the oil and gas bet.

As early as the turn of the year 2020/2021, a number of hedge fund leaders predicted a comeback of the economy from the Corona Valley and an associated rise in the oil price.

"Hedge funds are getting bullish on oil again," wrote the Reuters news agency in February of this year.

"By the summer, in time for travel time, the vaccine should be widely available," the news agency quoted, for example,

, the co-founder of the New York hedge fund Maglan Capital.

"We're going to see some incredible oil prices in the years to come."

In the USA, the hoped-for "herd immunity" against Covid-19 may be achieved by the summer, prophesied

, head of the London hedge fund Westbeck Capital Management - and invested heavily in oil futures and stocks.

"For the first time in a long time, oil companies are looking as if they could make a big comeback," said the finance professional, formulating his expectations at the time.

Mind you: Investments in oil and gas companies did not only appear critical from an ESG perspective at the time.

The share prices of industry giants such as Exxon Mobil, BP, Royal Dutch Shell or ConocoPhillips were still bobbing in the basement.

Oil prices were quoted at around $ 50 a barrel in early 2021 - so they had also seen significantly higher levels.

However, none of this scared the hedge fund professionals: They built up extensive positions in the oil and gas business, for example, acquired shares in Exxon, ConocoPhillips, Chevron and BP on a large scale, as reported by Reuters.

And the investors were right: apart from the recent economic slowdown, which is mainly related to global delivery bottlenecks, the global economy has made a strong comeback since the Corona low in recent months.

Oil prices are now trading above $ 80 a barrel again - and the trend is rising - and the shares of large oil companies have risen by between 40 percent (e.g. Royal Dutch Shell or BP) and 80 percent (ConocoPhillips) since the beginning of the year.

Alternative investment theme: nuclear energy

"People don't understand how much money can be made from things people hate," said

, co-founder of Bison Interests, another hedge fund man who doesn't shy away from "dirty" stocks. Whereby: Young avoids at least the "dirtiest companies", as the "FT" reports.

In short: unlike TCI boss Chris Hohn, for example, many hedge funds still consider the prospects of returns to be more important than ideals such as sustainability or environmental protection. Whereby people like Crispin Odey or Josh Young can hardly be denied at least a certain degree of realism: Their stock deals, which for some people seem disreputable, only pay off because the energy transition worldwide is still a long way from being as advanced as many idealists are wish. That means: Oil and gas companies are criticized by climate protectors and avoided by ESG investors. However, they are currently still needed in the global economy and are doing good business, as shown not least by the renewed rise in oil prices.

Then there is finally the golden mean: even nuclear energy has recently found friends among hedge funds. Strict ESG investors also often reject commitments in this area because of the known dangers posed by possible accidents in nuclear power plants. On the other hand, nuclear reactors do not generate any climate-damaging CO2 pollution. The use of nuclear energy - currently a hotly controversial political issue

across the

EU - is therefore also advocated by prominent advocates such as Microsoft founder

(65) or Tesla boss

(50) at least as an interim solution on the way to a clean future .

One option for investors to bet on the future of nuclear energy is to invest in the nuclear fuel uranium. Not only small investors and gamblers who exchange ideas via social networks such as the Reddit platform have recently discovered this as a topic for themselves. Rather, hedge funds such as Light Sky Macro, Anchorage Capital or Tribeca Investment Partners are also betting on a future upswing in fuel. The calculation behind it: If the generation of energy from sun, wind and similar green sources is not expanded quickly enough, while on the other hand fossil fuels continue to fall apart, nuclear energy could face a new heyday.This is not pure theory, at least from an investment perspective - the prices for uranium and the corresponding investment derivatives have recently risen considerably after a long period of stagnation.