As institutional investors shun oil and gas stocks because of the environmental, social, and corporate governance (ESG) trend and pressure to align portfolios to a pathway to net-zero, hedge funds are reaping the benefits of soaring commodity and energy share prices, the Financial Times reports.
Investors are under pressure from clients to follow stricter ESG criteria in investing, while banks are also pressured to show ESG responsibility and cut or eliminate exposure to the oil and gas sector. At the same time, the hedge funds are scooping up oil and gas stocks and are reaping returns as oil prices have risen this year and pushed up shares in many oil companies.
“They [big institutional investors] are all so keen to get rid of oil assets, they’re leaving fantastic returns on the table,” the founder of London-based Odey Asset Management, Crispin Odey, told the FT.
Returns for hedge funds have been handsome so far this year, several hedge fund founders and managers told the FT, noting that investment in the oil and gas sector is still needed.
Oil demand is approaching pre-COVID levels, while natural gas demand is already exceeding supply, as seen in the record-high prices every other day.
Apart from the growing ESG trend that has had pension funds and banks pledge divestment from some energy subsectors, poor returns in recent years have also alienated investors.
“The new economy is over-invested and the old economy is starved,” Jeff Currie, Global Head of Commodities Research at Goldman Sachs, told Bloomberg earlier this week.
Tech returns, for example, have been great, while ‘the old economy’, not only energy, has seen weaker returns. The 2008/2009 financial crisis started the Wall Street trend of shunning old-economy stocks because investors were unwilling to bet on long-cycle capital expenditure, Currie told Bloomberg. The current global energy crunch is a sign of the “revenge of the old economy,” he added.