With war raging in the Middle East and the price of oil rising to just below $100 a barrel, institutional investors are asking which hedge fund strategies are best positioned to weather energy-driven market shocks. On Monday, oil surged to $120 a barrel, before the G7 announced an emergency meeting to discuss options to keep prices in check, including releasing supply from strategic reserves. 

An analysis from hedge fund research firm PivotalPath shows that when oil prices spike, managed futures and global macro commodities strategies tend to generate strong returns.

In periods when crude traded between $100 and $140 per barrel, managed futures funds rose 9.1 percent on average and global macro commodities strategies gained 8.8 percent, while the S&P 500 fell 1.6 percent.

Using 26 years of proprietary data on hedge funds, PivotalPath analyzed how strategies performed across different crude oil price regimes since 2000.

The impact of oil prices on hedge fund strategies “has become the question for allocators,” said Jon Caplis. He added that “oil has become the main character,” and that uncorrelated returns and hedge fund risk mitigation now truly matter.

Caplis said the most dramatic effects occur at the extremes — when oil trades below $50 or above $100 per barrel, periods when stocks struggle while certain hedge fund strategies perform well. 

In a very high oil regime, the performance of hedge fund strategies overall, however, has been more muted, with PivotalPath’s broad composite index rising to just 2.5 percent.

Hedge funds generate strong returns when oil prices are on the low end — between $19 and $50. The composite index, which includes about 40 strategies, increased 10.2 percent on average.

Of course, some strategies did even better in the low-price regime. PivotalPath’s global macro discretionary index was up 13.2 percent, and the global macro commodities index increased 13.3 percent. In contrast, low oil prices can weigh on stocks, with the S&P 500 rising only 0.7 percent on average during those periods.

Most hedge fund strategies have some positive correlation to crude oil.  Among the highest are global macro quant, with a 12-month correlation to crude of 62.4 percent, followed by global macro at 56.2 percent and relative value credit at 55.2 percent. Multi-strategy hedge funds have meaningfully less positive exposure at 38.1 percent.

Managed futures funds have historically performed well when crude prices rise, often holding long positions in crude and related stocks and commodities.

Caplis cautioned that correlations between hedge fund strategies and crude prices can shift if oil remains elevated for a prolonged period. Over the past 12 months, crude oil and the S&P 500 have been positively correlated. But historically that relationship has been unstable and can quickly turn sharply negative during periods of energy shocks, as it did during the surge in oil prices around 2003, 2005, and the financial crisis, he said. 

When those shocks occur, he said, investors want something that can adapt.

Higher oil prices are notorious for kicking off higher inflation. According to PivotalPath, when inflation rates are between 3.3 percent and 9.1 percent, managed futures returned 12.8 percent and global macro commodities, 13.4 percent. Multistrats generated returns of 4.2 percent.