The Dynamis Fund: An Energy Hedge Fund

Fred Bocock was examining the performance of the Energy Hedge Fund and the Energy Portfolio, a hedge fund and a mutual fund respectively, which he manages. Bocock had become increasingly aware that absolute returns or relative returns (returns relative to a benchmark) may not adequately capture his performance and some measure of risk-adjusted performance was necessary. The Dynamis Energy Hedge Fund extends the discussion of performance evaluation into the hedge fund arena. (See “Zeus Asset Management,” UVA-F-1232, for an examination of performance evaluation techniques in the mutual funds arena.) More broadly, the case engages students in discussions on what hedge funds are, what investment strategies they use, and who their investors are. Since the portfolio manager of Dynamis manages both an oil sector equity mutual fund and an oil sector hedge fund, the case allows for a comparison between a hedge fund and a mutual fund. Students should consider the pros and cons of evaluating the performance of the oil stock mutual fund against a number of oil sector stock indices as well as against a number of generic indices, such as the S&P 500 Index. The use of futures, options, shorts, and leverage by hedge funds makes it a lot more difficult to measure their performance. The case comes with a spreadsheet that contains data on the energy mutual fund, the Dynamis hedge fund, and several relevant indices. Excerpt UVA-F-1337 THE DYNAMIS FUND: AN ENERGY HEDGE FUND As Fred Bocock looked at the performance of the Energy Hedge Fund, (also known as the Dynamis Fund and the Energy Portfolio) at the end of the first quarter of 1998, he was relieved to see that the portfolio was up slightly for the first quarter. But he could not help focusing on the fact that he was still down 15% from his 3rd quarter 1997 level. He knew that periods of negative returns were not uncommon given the volatility of the energy sector, but this decline had occurred during a period when the S&P had gained 15%. Lagging the S&P by 30% over the last six months would not make a very good selling point for new clients. The hedge fund, on the other hand, was down 6% for the quarter, 18% for the last six months, and had experienced much greater volatility. There was little disagreement that the 25% decline in the price of oil since October 1997 had negatively influenced the universe of upstream energy companies in which he invested. . . .