Hedge Fund With ‘Fantastic Opportunities’ Targets 200% ReturnBy
AAM Absolute Return bets against U.S. energy infrastructure
Main long is in U.S. shale oil producers, sees true value now
A hedge fund in Oslo focusing on energy stocks says it can hardly get any better than right now.
The fund has loaded up on both long and short bets in a market with “very big mispricings,” Harald James-Otterhaug, chief executive officer at Oslo Asset Management, said in an interview last week.
“It’s one of the most opportunity rich markets we’ve ever seen,” he said. “What’s unique now is that there are fantastic opportunities both on the long and short side at the same time. That’s unusual for such a cyclical industry.”
Energy companies have had a bumpy ride since the oil price collapse started in 2014 but stocks have now recovered some of way along with the rebound in oil prices. The MSCI World Energy Index has risen more than 40 percent after reaching a low in January 2016.
James-Otterhaug sees a potential return of 150 percent to 250 percent for his $320 million AAM Absolute Return Fund.
“We’ve never been close to what we have today,” he said. “We think it has potential to be released pretty fast. The opportunities we’re exposed to now are double what they’ve been historically.”
The fund, which uses fundamental analysis to pick stocks that it views as over or undervalued, seeks to avoid correlation with any asset class. That strategy has generated a a net return of 12 percent a year since starting at the end of 2005. So far this year it has gained 10 percent through March. In 2015, it was the world’s best performing hedge fund with a 59 percent return, according to HSBC.
James-Otterhaug and his team held 24 long positions and 34 shorts at the end of February. The equity net position was minus 13 percent. The fund is short U.S. energy infrastructure, including companies organized as Master Limited Partnerships.
“There are many companies that have adopted a dividend policy that isn’t sustainable and is based on increased debt and share issues,” he said. “If these companies were valued in a traditional way, on underlying cash flow, there’s a 70 to 90 percent downside in the stock price.”
The fund’s main long positions are in U.S. shale oil producers since James-Otterhaug sees limited downside and a “cheap” option on higher oil prices.
“If oil goes to $80, they will rise by 200 to 400 percent,” he said. “Oil producers are really out of favor. It could be the first time we’ve seen true value in some of them.”