Oil hedge fund, BlueGold sent out a letter to shareholders Thursday announcing they will be closing up shop after four years of trading. BlueGold became known in 2008 when it called the peak of the oil market, however since then, the fund has ranked in the bottom half of its peers.
The fund did not give a reason for closing but did say that it would be giving back 98% of the customer funds this year. Last year was not a good year for most fund, particularly BlueGold who was down 35%. That came after the fund saw its assets shrink from $2 billion to $1.2 billion in 2010. In fact, the only good year the fund saw was its first year in 2008 when they saw gains of 200% while others suffered. Also, 2009 showed great return of 55%. Unfortunately, BlueGold was not able to continue the momentum of strong performance.
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Oil funds similar to BlueGold have been blamed for spikes in oil prices. Speculators say that supply and demand will dictate the prices but it is hard to believe that they do not play a part in the rise of oil prices. Regardless, these oil funds tend to underperform the market anyways. When you have a fund that invests in one commodity, your returns are all depending on the returns of the underlying commodity. If you are the wrong side of the trade when the market turns, that can be a disastrous scenario for your investors. In this case, we do not know the full details of why they are closing up shop but if the recent returns give us a clue, they were continuously on the wrong side of the oil market. Timing the markets with risky commodity speculation is a very difficult maneuver which is not recommended for value investors. The best “market timing” strategy for value investors is simply knowing when a correction is coming, or when a bottom is coming so that you will be able to take advantage of some great opportunities.
BlueGold is another example of why it is always good to do your own research of a fund to make sure it works for your investment goals. A conservative investor should not be investing in a volatile fund such as the BlueGold fund we have been talking about. There are plenty of great value funds out there that provide much more stable, reliable gains for investors.