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Some Hedge Fund Small-Cap Energy Stocks Have Been Free Falling


Aug. 3 2015, Published 4:44 p.m. ET

Small-cap energy stocks see heavy losses

According to a July 28, 2015, Bloomberg article, there was a 34% fall in small-cap energy stocks over the past three months. These shares are tracked by the Russell 2000 Energy Index. Small-cap energy stocks have witnessed a 24% fall since June 26, which involved a series of losses over four straight weeks.

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Bottom fishing was abundant on the Russell index

The Russell index fell by more than 50% during the six months ended January 2015 as a consequence of a sharp fall in oil prices. According to Bloomberg data, ownership of hedge funds in the ~90 companies on the index is approximately double the rest in the American stock market.

Long-only strategy in energy stocks backfires

In April 2015, traders were ready to gobble up energy shares, and depressed valuations were used as the sole criterion. There wasn’t much attention paid to company fundamentals. With oil failing to sustain its rebound, this approach backfired. With the market oversupplied, long positions by hedge funds in oil dropped relative to short positions last week.

Small-cap energy stocks subject to high short interest

According to Bloomberg data, speculators heavily shorted energy companies tracked by the Russell 2000 Index toward the end of June. The short interest, or the amount of short positions held by investors that are uncovered, amounted to 10% of the outstanding shares of the average energy company on the index opposed to 4.5% for the overall index.

In the upcoming parts of this series, we’ll analyze the 2Q15 performance of oil majors BP (BP) and Royal Dutch Shell (RDS.A). Low oil prices are favoring refiners such as Tesoro (TSO) and Valero Energy (VLO), which make up 5.3% of the Energy Select Sector SPDR ETF (XLE).


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