Energy whiz Andrew Hall is in serious danger of posting his second loss in three years.
The chairman and chief executive officer of Westport, Connecticut–based Astenbeck Capital Management posted a 3.58 percent drop in the offshore component of his flagship hedge fund strategy for November, his third straight monthly loss. That puts his funds down 8.43 percent for the year to date. He also lost 3.83 percent in 2011, these two losing years sandwiching an anemic 3.41 percent gain in 2012. What’s more, over the most recent three-year period, Hall has also lagged his chosen benchmark — the S&P GSCI (formerly the Goldman Sachs Commodity Index) — including each of the two losing years.
Hall’s disappointing performance with Astenbeck is all the more notable given his rock-star reputation before he founded the firm. He shot to fame as an energy trader at Westport, Connecticut–based Phibro, a commodities trading firm that he joined in 1982 as an oil trader when it was a Salomon Brothers subsidiary. There, Hall earned eye-popping returns — and a fair bit of notoriety. In 2009 he got into a public battle over a massive bonus — rumored to be $100 million — from Citigroup, which then owned Phibro. That was the same year that Citi received bailout money from the U.S. government. Citi avoided the huge public relations and political fallout when it sold the Phibro business to Occidental Petroleum Corp.
Hall was also thrust into the media spotlight earlier this year when Bloomberg reported that he’d bought 2,400 acres of land in Reading, Vermont, where he is said to be selling handmade lavender soap and grass-fed Angus beef. Hall, who reportedly also owns a 1,000-year-old castle in Germany, owns a private museum, Hall Art Foundation, in Reading, where he displays his private art.
It is still conceivable that Hall could finish this year in positive territory, given his penchant for wide short-term swings in performance. As recently as the end of August, his funds were up more than 2 percent. Last year a big gain in November enabled him to avert another losing year. However, most of his biggest monthly moves in the past few years have tended to be to the downside.
In an eight-page letter dated December 2 and obtained by Alpha, Hall is clearly frustrated by his performance. Citing John Maynard Keynes’s analogy between investing in the stock market and guessing the winner of a beauty contest, Hall tells clients shares are not priced based on their actual fundamental value but more on what the majority of other investors believe what they are worth. “Of course this logic can be applied to other markets, commodities included,” he adds. “And for now, the majority view of commodities is a rather baleful one due to the perception of plentiful supply and lackluster demand.”
Hall manages roughly $4.1 billion, including $2.3 billion in the Astenbeck Master Commodities Fund II. The fund invests primarily in commodities, including crude oil, refined oil products, natural gas, metals and agricultural commodities.
Hall owns 80 percent of Astenbeck, while Los Angeles–based Occidental Petroleum owns the other 20 percent. Hall is also the chief executive of Phibro.
In the letter, Astenbeck discusses why the outlook for several commodities is not good. For example, he notes that the consensus view of oil turned “distinctly more bearish last month.” He notes there is a growing concern surrounding potential oversupply, fueled by a flurry of factors: the limited lifting of sanctions against Iran; the belief that the situation in Libya — which is currently exporting virtually no oil — can only get better; Iraq is expected to meaningfully boost exports; and long-delayed projects in Kazakhstan and Brazil will finally come to fruition in 2014. Add to those factors the belief that domestic shale oil producers will continue to ramp up their production in 2014 and beyond.
“Whether or not the foregoing is correct or is outweighed by other considerations doesn’t matter for now,” an obviously frustrated Hall states in the letter. “It is what the majority of market participants believe and it’s what current prices . . . reflect. Does that mean we should give up trying to analyze the market in terms of fundamentals?”
He goes on to say the answer would be yes if he could anticipate the views of others. But Hall stresses this is not possible to do consistently. “Ultimately fundamentals do determine prices,” he reminds his investors. “As Warren Buffett likes to say, in the short term the market is a voting machine, in the longer term it is a weighing machine.”
Hall then refutes each of the notions surrounding supply. Regarding Iran, he stresses that more complicated negotiations over relaxing sanctions are needed. In the meantime, Iran’s aging oil fields starved of investment will prevent the country from pumping meaningful amounts of oil.
Hall says it is unlikely things will get better in Libya anytime soon as unrest and political discontent seem to be worsening. And although Iraqi output could increase, there is still a big risk for interruptions. And in the U.S., Hall believes overall oil production — including from Alaska — will come in way below consensus.
On Wednesday, Hall received a bit of vindication for his views. The U.S. Energy Information Administration announced a 2.7 percent decrease in stockpiles in the most recent week. Another report on Wednesday predicted that North Sea output will drop 4 percent in January compared with December. Meanwhile, Hall believes demand forecasts for 2014 are way too low, so he is banking on rising oil prices in 2014.
If Hall is wrong and oil prices decline or remain flat in 2014, however, Hall’s legend will continue to erode.
