The news that London-based hedge fund GLG intends to seed an oil production company is interesting on many fronts. For one, as the FT reports, it marks a clear drive for diversification and expansion at a company that currently looks after some $18bn in hedge funds and long-only investments. It also reflects the firm’s efforts to establish itself as an investment institution.
However, from a commodities perspective, it is perhaps also indicative of the fact that unless you have the means to play in the physical market, your competitive edge may be lost to those who can. Currently, Morgan Stanley and Goldman Sachs are by far the largest financial firms active in the physical market via a portfolio of different investments spanning everything from stakeholdings in refineries to shipping companies.
It is not yet clear what manner of investments GLG’s oil vehicle Lothian will be looking to invest in. But, as it’s not an acquisition of an established business, it won’t be governed in its strategy by established assets. As a newly formed venture it will be able to adapt to the necessities of the moment. This offers huge flexibility.
What we do know, according to Reuters, is that it is expected to focus on the acquisition of oil production assets worldwide.
In that case, the move literally has the potential to open up a world of physical inventory to underpin its paper commodities investments. What’s more, with the increasing longevity of the contango in the oil structure it will allow GLG to play the ultimate storage trade. That’s because production assets in the ground allow for income streams from forward sales, but come without the associated storage costs.
Above all, investment in production assets also brings key insight into physical flows. Oh, and those Nymex position limits don’t apply to physical players either.
Related links:
A forward curve proposition - FT Alphaville
Who’s in the wake for shipping losses? - FT Alphaville