Hedge Funds Sell Off Winning Energy Stocks to Buy Soaring Oil

With energy stocks trading near all-time highs and oil climbing as well, hedge funds think they’ve found a trade to capitalize: Sell the shares and pour the profits into buying more crude.

Hedge funds have been selling US energy stocks for three straight weeks, according to prime brokerage data from Goldman Sachs Group Inc. The net allocation to energy also is well below historical levels, with energy now making up just 2.2% of overall US net exposure on Goldman’s prime brokerage book. And the sector’s long-short ratio has fallen to a five-year low.

Meanwhile, Brent crude is back around $90 a barrel, and the volume of bullish Brent options just surged past the record set in 2019. Traders are betting on further increases in oil prices after Israel vowed to respond to Iran’s weekend missile and drone attack.

oil call

“We are seeing some lottery ticket buying in crude with June $250 call options as investors are actively hedging a tail event in the commodity” said Rebecca Babin, senior energy trader at CIBC Private Wealth Group. “Macro hedge funds are already pretty long crude due to the reinflation trade, and to hedge against geopolitical risks they use options rather then underlying crude.”