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Oil's Drop Hits Big Investors Hard
From the Wall Street Journal of Thu, 18 Dec 2014 22:30:23 EST
Carl Icahn has seen his firm’s holdings of Talisman Energy tumble $230 million since late August.
Carl Icahn has seen his firm’s holdings of Talisman Energy tumble $230 million since late August. Reuters

The recent slide in oil prices has caused sharp losses among some of Wall Street’s biggest names, the latest in a series of bad bets made by star investors during 2014.

Carl Icahn , the billionaire activist investor, has seen his firm’s holdings of Canadian oil-and-gas company Talisman Energy Inc. tumble $230 million since late August, based on an analysis of his holdings, a rare stumble for the prominent investor. Icahn Associates Corp. was the largest holder of Talisman, with more than 7% of the company’s shares.

The Icahn losses were more than $540 million as recently as Dec. 11 before Talisman agreed to be purchased, boosting the stock. At the deal price, he would lose about $290 million on his original investment, according to the analysis. His company’s total investment portfolio was up 4.4% through the first nine months of the year, according to regulatory filings.

“In this oil environment, I’m certainly glad a bidder came along for it,” Mr. Icahn said. “I believe oil is going to go lower, but I think over the long term it presents great opportunities.”

The $19 billion firm run by billionaire John Paulson had one of its largest losses of the year on a gamble that big oil firms would gobble up smaller ones, according to investors and people briefed on the trade. Instead, some smaller energy stocks held by Paulson & Co. plunged in value amid weak crude prices. Mr. Paulson’s strategy could yet pay off; many analysts expect consolidation in the energy sector as larger companies buy smaller firms now under pressure.

It wasn’t clear just how big Paulson & Co.’s loss was. This year, several of the funds controlled by Mr. Paulson, who became famous for his successful bet against the housing market just before the financial crisis, experienced double-digit-percentage losses, according to an investor.

Mr. Paulson didn’t respond to requests for comment.

Many fund managers weren’t prepared for the drop in oil prices, as smaller funds posted losses of as much as 40% due to their exposure to energy companies and an oil-related currency crisis in Russia, investors said.

“The move has been breathtaking and relentless,” said Scott Warner, of Pacific Alternative Asset Management Co., an Irvine, Calif., firm that invests in hedge funds for institutional investors and has $9.5 billion in assets under management. “There’s definitely been some pain out there.”

The oil losses are adding to monthslong troubles in the $2.8 trillion hedge-fund industry, which has been battered by several popular trades in one of its worst years since the 2008 financial crisis.

The industry is essentially flat for the year, following an average loss of about 2% by stock funds during the first two weeks of December, according to industry research firm HFR.

By contrast, the S&P 500 index is up 10.48%, including dividends, through the same period.

The most recent round of pain for many hedge funds began with the Nov. 27 decision by the Organization of the Petroleum Exporting Countries to keep pumping oil despite a glut, triggering the fastest selloff in crude prices since 2008. The price of U.S. oil fell below $60 a barrel for the first time in five years this month, punishing currencies of big oil exporters around the world.

On Thursday, oil fell further, down 4.2%, to settle at $54.11 a barrel, on the New York Mercantile Exchange, its lowest level in more than five years.

Those caught flat-footed by the price pullback include Prosperity Capital Management’s Mattias Westman, a longtime investor in Russia whose firm lost more than $1 billion this year, in part on stakes in Russian energy companies OAO Gazprom , OAO Bashneft and Lukoil Holdings . He now manages about $2 billion, down from $4 billion at the start of the year, as some investors also pulled funds. Some losses are tied to the ruble’s fall against the dollar.

“It’s quite unfortunate,” said Mr. Westman, who bet that OPEC’s decision to maintain crude output levels wouldn’t affect prices as significantly as it did because such a move had been flagged previously.

Some hedge funds were on the right side of falling oil prices. London-based Andurand Capital Management LLP, run by former Goldman Sachs Group Inc. and Vitol Inc. oil trader Pierre Andurand, is up 33% through Dec. 12, according to a person familiar with the firm. The $400 million Andurand firm had bet on a fall in crude-oil prices, wagering that OPEC wouldn’t cut output, the person said.

Brazilian private-equity firm 3G Capital, which bought ketchup maker H.J. Heinz Co. with billionaire investor Warren Buffett , recently launched a hedge fund that is up more than 20% for the year through November on the back of a similar prediction, according to an investor presentation. The fund is run by Dan Dreyfus, a former longtime proprietary trader for Goldman Sachs.

While some funds appear to have escaped big hits after reducing exposure to energy and related investments, large losses have hurt some specialized funds.

Dorset Management Corp.’s energy fund, which managed nearly $300 million as of July, was down 34% for the year through Dec. 12, according to an investor. UFG Asset Management’s $90 million Russia Select Fund was down about 31% through mid-December, compared with a roughly 47% drop for the period for the MSCI Russia index, which has been hurt in part by the tumble in crude.

Mr. Paulson’s bet that shale-energy producers would consolidate existed in more than one of his funds, said clients. At the end of the last quarter, according to FactSet, Paulson was the biggest holder of Whiting Petroleum Corp. and Oasis Petroleum Inc., big producers in the Bakken, one of North America’s most prolific shale fields. The firm also held shares of other producers.

Whiting is down from $77.55 to $31.91 since Sept. 30 through Thursday’s close, and Oasis is down from $41.81 to $16.25 over the same period.

A hedge intended to protect Paulson & Co. from a drop in oil prices hasn’t worked fully because the hedge, a wager against at least one oil-stock index, hasn’t fallen nearly as much as the smaller companies the fund owned, according to an investor in the fund. That is because larger energy producers in the index have held up better than the shale-focused companies Paulson owned, the person said.

Earlier this year, Paulson & Co. was battered by unraveling trades on housing-finance companies Fannie Mae and Freddie Mac and a proposed drug company merger that collapsed.

Mr. Icahn is known for his timely stakes in large companies, but the sudden decline in oil prices worsened a cash crunch faced by Calgary-based Talisman, according to its chief executive. Mr. Icahn amassed about 76 million shares of Talisman last year and became its largest shareholder.

After Repsol SA announced a $8.3 billion deal to buy Talisman, the shares climbed back from a low of $3.69 on Dec. 11; it closed at $7.78 on Thursday. Mr. Icahn also holds stakes in hard-hit energy companies Chesapeake Energy Corp. and Transocean Ltd.

Some hedge funds are looking to take advantage of the turmoil, some investors said, looking at everything from debt and stocks that sold off sharply to longer-term opportunities, like lending to distressed energy companies that are facing payments due in coming months. The $14 billion Avenue Capital Group, a longtime energy investor, has invested hundreds of millions of dollars in energy-related investments since November alone, said a person familiar with the firm.

“We’re sifting through the wreckage” to find energy companies that are still profitable at lower oil prices, said Michael Reeber, a founder of $230 million hedge fund Andalusian Capital Partners.

But for most fund managers, mea culpas to investors are more common as 2014 draws to a close. Leon Cooperman, the founder of Omega Advisors, said in an October letter that “we are disappointed with our performance” after disclosing a 1.4% return through the first nine months of the year.

Omega had 17% of its portfolio in energy stocks at the end of September. Its returns have since shrunk, according to a person familiar with the firm. It is now up a total of 0.6% for the year through November, the person said.

Write to Juliet Chung at and Gregory Zuckerman at

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