Hedge Funds Purchasing Oil Stocks in Wake of BP Oil Spill

August 19, 2010

Managers of top hedge funds added oil stocks to their holdings in the second quarter of 2010, buying shares whose prices had dropped drastically following BP’s enormous oil spill in the Gulf of Mexico.  These actions were taken despite a global market of lower oil prices.

Top hedge fund managers, including Carl Icahn, Eric Mindich and Dinakar Singh, whose choices in stocks are observed closely by investment analysts, reportedly were buying bargains in energy stocks during the second quarter.

The dropping in price of oil stocks was attributed mainly to investor uneasiness due to BP’s oil disaster in the Gulf of Mexico.  BP’s stock in particular lost half of its value in the weeks following the Deepwater Horizon oil rig explosion, and subsequent oil spill, in April.

Additional hedge funds to add oil stocks to their portfolio include Adage Capital and SAC Capital Advisors LP, run by Steven Cohen. Hedge fund managers David Einhorn, and Jeff Vinik, formerly of Fidelity Investments, also bought oil stocks during the second quarter.

In a second quarter which included expectations of a double dip recession in the U.S., as well as an enigmatic stock market crash on May 6th, energy stocks were among the worst performers in the market.

However, investors bold enough to enter the oil market have already started seeing a return.  Specifically, shares in BP have risen by 28% since the end of the second quarter.

Billionaire Carl Icahn purchased nearly $1 billion of oil stocks during the second quarter, including oil and gas producer Anadarko Petroleum and offshore drilling specialist Ensco’s sponsored American Depository Receipts.

David Einhorn’s Greenlight Capital also bought a little over 5% of Ensco’s shares in the second quarter.

Other oil industry stocks purchased by hedge funds included drilling services specialist Baker Hughes and oil services company, Halliburton.

Eric Mindich, formerly of Goldman Sachs, bought both shares and call options in BP, as well as shares in other energy companies, including Diamond Offshore Drilling, Forest Oil, Marathon Oil, and Suncor Energy.  Mindich first started his hedge fund in 2004 with a record $3 billion from his investors.

In other purchases not related directly to the oil industry, David Einhorn and John Paulson of the Paulson Funds bought shares in pharmaceutical giant Pfizer. Paulson also unexpectedly purchased one million shares of Goldman Sachs Group.

Hedges funds are by law allowed to use aggressive strategies which mutual funds can not, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Because of their restriction of no more than 100 investors per fund, hedge funds are exempt from many of the rules and regulations governing mutual funds.

Because of the small amount of investors, most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. Like traditional mutual funds, hedge fund investors pay a management fee as well as an average 20% of the profit.