The 2014-2015 energy carnage has been worse for crowded hedge fund energy positions than the global financial crisis. Past liquidations of crowded hedge fund bets were followed by rapid recoveries. Consequently, energy investors should survey the wreckage for opportunities.

Crowded hedge fund oil and gas producers underperformed their sector peers by over 20% since 2013 as fund energy books were liquidated. Crowded oilfield service bets underperformed by over 15%. This is worse than 10-15% underperformance during the 2008-2009 global financial crisis.

Forced hedge fund portfolio liquidations are usually followed by rapid recoveries in the affected names – liquidations during the global financial crisis reversed in under a year. Since the energy market in 2015 faces unique challenges, history may not repeat itself. Still, some of the crowded positions should present opportunities.

Performance of Crowded Hedge Fund Oil and Gas Producer Bets

To explore crowding we analyze hedge fund Oil and Gas Producer Sector holdings (HF Sector Aggregate) relative to the Sector Market Portfolio (Sector Aggregate). HF Sector Aggregate is position-weighted; Sector Aggregate is capitalization-weighted. This follows the approach of our earlier articles on hedge fund crowding.

The figure below plots historical return of HF Oil and Gas Producer Aggregate. Factor return is due to systematic (market) risk. Blue area represents positive and gray area represents negative risk-adjusted returns from security selection (αReturn). Crowded bets underperformed the portfolio with the same systematic risk (factor portfolio) by over 50% during the past 10 years, largely since 2014:

The risk-adjusted return from security selection (αReturn) of HF Sector Aggregate is the return it would have generated if markets had been flat – all market effects on performance have been eliminated. This is the idiosyncratic performance of HF Sector Aggregate:

The above chart reveals that by Q2 2009 the crowded hedge fund energy producers erased underperformance due to 2008 liquidation. The liquidation since 2013 has been even larger than in 2008. Since they may be posed for a steep recovery, crowded hedge fund oil and gas producer bets are worth watching in the coming months.

Performance of Crowded Hedge Fund Oilfield Service Bets

The figure below plots historical return of HF Oilfield Service Aggregate. It follows the approach of HF Oil and Gas Producer Aggregate above:

Since 2013, the crowded oilfield service portfolio has underperformed, similarly to the crowded oil and gas portfolio:

Crowded energy producers and service companies have underperformed sector peers by 15-25% in the latest liquidation. Many may now be attractive, given the recovery that typically follows. Below are the hedge fund energy bets that may present these opportunities:

Crowded Hedge Fund Oil and Gas Producer Bets

The following stocks contributed most to the relative residual (idiosyncratic, security-specific) risk of the HF Oil and Gas Aggregate as of Q1 2015. Blue bars represent long (overweight) exposures relative to Sector Aggregate. White bars represent short (underweight) exposures. Bar height represents contribution to relative stock-specific risk:

The following table contains detailed data on these crowded hedge fund oil and gas producer bets:

		Exposure (%)		Net Exposure			Share of Risk (%)
		HF Sector Aggr.	Sector Aggr.	%	$mil	Days of Trading
WPZ	Williams Partners, L.P.	17.93	4.75	13.18	1,812.2	15.0	23.04
PXD	Pioneer Natural Resources Company	14.42	4.01	10.41	1,432.0	4.9	17.91
CRC	California Resources Corp	3.42	0.48	2.93	403.2	8.2	10.79
CHK	Chesapeake Energy Corporation	8.31	1.55	6.76	930.1	2.8	9.95
COP	ConocoPhillips	0.99	12.62	-11.63	-1,599.0	-3.7	7.00
OXY	Occidental Petroleum Corporation	0.69	9.25	-8.56	-1,176.6	-3.3	5.45
EOG	EOG Resources, Inc.	2.13	8.28	-6.14	-844.7	-2.4	4.40
RRC	Range Resources Corporation	5.33	1.45	3.88	533.8	3.4	3.68
CIE	Cobalt International Energy, Inc.	3.10	0.64	2.46	338.2	11.2	2.93
OAS	Oasis Petroleum Inc.	3.15	0.33	2.82	387.9	2.7	2.39
CMLP	Crestwood Midstream Partners LP	3.83	0.45	3.38	465.2	47.0	1.99
AR	Antero Resources Corporation	3.97	1.60	2.37	325.5	4.5	1.39
WLL	Whiting Petroleum Corporation	3.57	1.04	2.53	347.5	1.2	1.06
NBL	Noble Energy, Inc.	0.28	3.12	-2.84	-390.1	-2.2	0.80
CLR	Continental Resources, Inc.	0.18	2.68	-2.50	-344.1	-2.2	0.76
COG	Cabot Oil \& Gas Corporation	0.49	2.01	-1.52	-209.5	-1.1	0.71
DVN	Devon Energy Corporation	0.55	4.06	-3.51	-483.0	-2.2	0.62
EQT	EQT Corporation	0.16	2.07	-1.91	-262.3	-2.5	0.59
APA	Apache Corporation	1.15	3.74	-2.59	-356.6	-1.7	0.47
APC	Anadarko Petroleum Corporation	4.99	7.02	-2.04	-280.2	-0.8	0.43
…	Other Positions			0.80			3.65
Total							100.00

Crowded Hedge Fund Oilfield Service Bets

The following stocks contributed most to the relative residual risk of the HF Sector Aggregate as of Q1 2015:

The following table contains detailed data on these crowded hedge fund oilfield service bets:

		Exposure (%)		Net Exposure			Share of Risk (%)
		HF Sector Aggr.	Sector Aggr.	%	$mil	Days of Trading
BHI	Baker Hughes Incorporated	32.63	9.95	22.68	1,258.9	6.1	50.38
SLB	Schlumberger NV	3.31	38.39	-35.07	-1,946.7	-2.8	22.65
HAL	Halliburton Company	28.87	13.42	15.45	857.4	1.4	12.44
DAKP	Dakota Plains Holdings, Inc.	0.31	0.04	0.27	15.1	78.3	3.86
HOS	Hornbeck Offshore Services, Inc.	3.21	0.24	2.97	164.9	6.8	1.89
NOV	National Oilwell Varco, Inc.	2.88	7.38	-4.49	-249.4	-0.9	1.45
FTI	FMC Technologies, Inc.	0.02	3.08	-3.06	-169.9	-1.2	1.06
FTK	Flotek Industries, Inc.	1.51	0.29	1.22	67.9	5.8	0.85
WFT	Weatherford International plc	1.25	3.43	-2.18	-121.1	-1.0	0.71
CLB	Core Laboratories NV	0.00	1.62	-1.62	-90.0	-1.1	0.57
SDRL	Seadrill Ltd.	0.00	1.66	-1.66	-92.1	-0.6	0.49
OIS	Oil States International, Inc.	2.71	0.74	1.97	109.5	2.7	0.39
EXH	Exterran Holdings, Inc.	1.98	0.83	1.14	63.4	2.6	0.36
USAC	USA Compression Partners LP	1.80	0.24	1.56	86.6	45.7	0.31
OII	Oceaneering International, Inc.	0.13	1.93	-1.81	-100.3	-1.5	0.27
FI	Frank’s International NV	0.00	1.04	-1.04	-57.7	-4.2	0.26
KNOP	KNOT Offshore Partners LP	2.31	0.12	2.19	121.4	47.1	0.25
RES	RPC, Inc.	0.05	1.00	-0.96	-53.0	-2.0	0.23
WG	Willbros Group, Inc.	0.46	0.07	0.39	21.5	11.3	0.19
MDR	McDermott International, Inc.	1.04	0.33	0.71	39.5	1.4	0.17
…	Other Positions			0.34			1.22
Total							100.00

Summary

• The 2014-2015 carnage has been worse for crowded hedge fund oil and gas producer and oilfield service bets than the global financial crisis.
• Past liquidations of crowded positions were followed by rapid recoveries.
• Energy investors should survey the wreckage of crowded hedge fund energy bets for opportunities.

The information herein is not represented or warranted to be accurate, correct, complete or timely.
Past performance is no guarantee of future results.
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