Hedge fund manager Zach Schreiber stood on stage at Avery Fisher Hall in New York eight months ago and made a bold prediction.
“We believe crude oil is going lower -- much lower,” Schreiber, 42, told the audience of roughly 3,000 investors, including some of the biggest money managers in the industry. “If you are long, I’m sorry for you.” Then he showed a slide of a car stuffed with clowns.
Crude was trading at $99 a barrel that day, bolstered by speculation that Russia’s annexation of Crimea and incursions into Ukraine would crimp shipments. Prices crept up over the next weeks peaking in June at $107. Then, as Schreiber predicted, the dive began.
Oil fell more than 50 percent through the end of the year as global supplies piled up, helping Schreiber’s PointState Capital make about 27 percent for the year after fees. The New York-based investment firm’s profit was about $2 billion in 2014 with about half of that from the oil trade, according to people familiar with the matter, who asked not to be identified because the firm is private.
PointState, which started 2014 with about $5.8 billion in assets, has been one of the biggest winners from the drop in oil as the U.S. energy industry ramped up production and Saudi Arabia and other OPEC nations chose not to cut supply in the face of increased competition.
The biggest drop in prices since 2008 has roiled global markets, pushing Russia towards recession, Venezuela closer to default and cutting into earnings for U.S. companies. It’s also punished hedge funds and other investors that were betting on the U.S. energy complex. Billionaire John Paulson was among the hardest hit, losing 36 percent in one fund last year in part because of energy company stocks.
When Schreiber spoke at the May conference, he was little known outside the $2.8 trillion hedge fund industry and had a low profile among peers.
He’d founded PointState in January 2011 with Josh Samuelson, Kenan Turnacioglu and Jack Franke, focusing on bets on and against stocks and wagering on global macroeconomic events. The group had worked together at investor Stan Druckenmiller’s Duquesne Capital Management until 2010, when Druckenmiller closed his 30-year-old hedge fund and returned client capital. PointState started with $1 billion from Druckenmiller and $4 billion from other investors.
At the event, the annual Ira Sohn Investment Conference that raises money for pediatric cancer research and care, Druckenmiller, 61, introduced Schreiber to the crowd as someone who’d traded energy, power, utilities and commodities for him for eight years. He told the attendees, who had paid at least $1,500 a ticket each, that the PointState crew in 2013 had beaten him “handily.” Schreiber and his colleagues had returned 30 percent that year, according to people familiar with the firm, compared with an average 7.4 percent gain for hedge funds.
Patrick Clifford, a spokesman for PointState at Abernathy MacGregor Group Inc., declined to comment on PointState’s trades or performance.
Schreiber laid out his argument for shorting West Texas Intermediate crude. He anticipated oil producers in the central U.S. region would keep building supplies leading to a collapse in prices.
Quoting Led Zeppelin’s “The Song Remains the Same,” he said the same scenario had unfolded in the natural gas market, where increased production had driven the commodity down.
His speech resonated with some in the audience. David Einhorn, who manages the $10 billion Greenlight Capital and was also speaking at the conference, described Schreiber’s presentation as compelling in a letter this week to investors. Greenlight then went short the commodity, offsetting losses in energy stocks the firm held at the time.
What Schreiber didn’t mention that day was the role of the Organization of Petroleum Exporting Countries, which pumps about 40 percent of the world’s oil and declined to cut production in response to increasing supply. At a Nov. 27 meeting, the organization agreed to maintain its production target at 30 million barrels a day, wagering that U.S. shale drillers would be first to slow output as prices fell.
Schreiber also told investors to buy shares of Valero Energy Corp. and Marathon Petroleum Corp. He expected these refiners to benefit from the spread -- or difference in prices - - between WTI and brent, which is extracted from the North Sea and at the time was trading at more than $107 a barrel. This part of the trade worked less well. As prices for the commodity fell dramatically, the stocks followed, tumbling 15 percent and
5.8 percent respectively through year-end. By the end of the third-quarter, PointState had cut its Valero holdings by more than 80 percent and its Marathon position by a third.
For PointState, it was a blip. The firm’s other $1 billion profit last year included a big wager on healthcare stocks and other macroeconomic themes, said the people.
Oil has continued its descent, with WTI falling more than 12 percent this year.
Schreiber ended his presentation that day with a quote from economist Rudi Dornbusch: “In economics, things take longer to happen than you think they will, and then happen faster than you thought they could.”