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By Devika Krishna Kumar and Liz Hampton
NEW YORK/HOUSTON, Jan 18 (Reuters) - Energy fund managerstook heavy losses last year with wrong-way bets on the prices ofoil and natural gas, leading to a wave of closures in thevolatile fund sector.
The number of active energy-focused funds fell to just 738in 2018 through September from about 836 in 2016, according tothe latest available data from hedge funds industry trackerEurekahedge. That's the lowest number of active funds since2010.
The number of funds solely focused on oil or gas has tumbledto 179 in 2018 from 194 in 2016. Funds that have suspendedoperations included high-profile names such as Jamison Capital'smacro fund, T. Boone Pickens' BP Capital and Andy Hall's mainhedge fund at Astenbeck Capital Management, along with smallerniche funds such as Casement Capital.
"There is a massive decline in the number of funds, and noreplacements," said David Mooney, founder of Casement Capital."There has been a near 'extinction event' in commodities hedgefunds."
"We had about 16 large hedge funds trading natural gas inHouston a few years ago," he said. "That number is now reducedto a small number of managers."
Some funds saw investors pull out because they increasinglyview energy as an unsafe spot for their money. Casementsuspended operations after difficulties raising investorinterest, two industry sources said.
The firm was supported by Lighthouse Partners, according toa regulatory filing. Lighthouse declined to comment, and Mooneywould not elaborate on the reasons for Casement's decision toclose.
"All hedge funds, including commodities, that are beingscrutinized for near-term performance are coming underpressure," said Jonathan Goldberg, founder of one of thebest-known energy-focused hedge funds, BBL Commodities.
Closures of energy-focused hedge funds have outpacedlaunches in the last three years, according to data fromEurekahedge.
"It becomes self-reinforcing," Goldberg said in aninterview. "If people lose money and are seeing negativefeedback for it, they cut risk and it becomes harder and harderto manage the business."
Macro hedge funds - those with strategies based on broadglobal macroeconomic trends, such as a bet that oil prices willrise - were among the hardest hit, falling 3.6 percent in 2018.That's the weakest annual performance since 2011, when suchfunds fell 4.2 percent, according to the Hedge Fund Research(HFRI) Macro index, a key industry index.
Through mid-December, commodity trading advisors (CTAs) weredown by 7.1 percent, according to a late December estimate byCredit Suisse.
In December, Goldberg said he would wind down BBLCommodities' flagship fund and focus instead on longer-termtrading opportunities. Goldberg's BBL Commodities Value Fundlost 14.2 percent in July, Reuters reported. Goldberg said inDecember that returns had been "limited" recently.
BAD BETS ON OIL, GAS
Funds took heavy losses this past year when oil prices tookan unexpected dive beginning in October amid growing worriesabout oversupply and weakening demand. U.S. oilfields hit anall-time production record last year at more than 11.5 millionbarrels a day.
A sharp rise in natural gas prices in late 2018, on concernsof tight supplies and cold weather, also added to the painbecause many funds had paired bets on lower natural gas andhigher crude.
Fluctuations in prices typically create opportunities forfund managers to book a profit, but the moves of oil and gasprices followed a prolonged period of subdued volatility inenergy markets and caught fund managers off guard.
Oil prices had rallied through most of the year, and hedgefunds built increasingly large bets on the rally continuing.
Money managers began the year with a record number ofbullish open positions in U.S. crude and largelymaintained them near those levels until mid-year.
That changed late last year, when the U.S. granted waiversto big purchasers of Iran's oil after reinstating sanctions onthe nation, and as the United States, Russia and Saudi Arabiaall produced at record levels, feeding worries about a supplyglut.
The market sunk in a series of volatile trading days asfunds rushed to unload positions.
INVESTOR PRESSURE
Hedge fund investors said they do not see the situation forniche funds improving. Among those that have been having themost difficulty are natural gas funds, said one recruiter whoworks with several funds and banks in the commodities industry.In November, U.S. natural gas futures experienced their mostvolatile streak in nine years.
Velite Capital, which emerged earlier this decade as one ofthe most profitable natural gas hedge funds, founded by startrader David Coolidge, began winding down in August.
Madava Asset Management, meanwhile, shut after investorBlackstone Group requested to pull funds, according to a WallStreet Journal report.
Timoneer Energy, a hedge fund specializing in natural gasfutures and options, also wound down last year, sources said.The firm was set up in 2015 by a portfolio manager and threeanalysts from Velite. Several former members of the fund did notrespond to a request for comment.
Two years ago, energy executives John James and Sachin Goelplanned to launch natural gas-focused hedge fund Mercasa Energy,backed by an initial commitment of $10 million from investorTitan Advisors, which has some $4.5 billion in assets undermanagement. But the fund was not able to secure additionalinvestments, and by early 2018, Mercasa had shut.
Titan Advisors declined to comment.
Ernest Scalamandre, founder of AC Investment Management, aninvestment firm focused on commodities, said he expects fundsdedicated to oil and natural gas to remain challenged.
"I don't envision the fundamentals changing all that muchfor gas and or crude," he said.
(Reporting by Devika Krishna Kumar in New York and Liz Hamptonin HoustonAdditional reporting by Jennifer Ablan in New YorkEditing by David Gaffen and Brian Thevenot)
