Shipping and Oil Service Investments A Hedge Fund’s Approach

By Jonas Andreasson, oceanic Hedge Fund

Shipping and certain sectors of the oil service industry are notoriously cyclical. These industries are seemingly forever tied to the boom and bust cycle of over capacity brought on by the over exuberance of new investment during the dramatic but all too brief good times. With an industry that is generally fragmented, with low entry barriers, the few well managed companies that exist struggle to escape from the destructive behaviour brought on by the lemming like behaviour of the multitude of investors who, each in turn, believe they hold the secret to success of outwitting the rest of the market.

The nature of the market has meant that few companies have taken the public route and opted for open stock listings. Those that have have generally provided the investor with zero, if not negative returns over the cycle. Some sectors have created some value and these tend to be the con soli- dated sectors of industrialised shipping such as car carriers. There are also signs that this is happening in the tanker sector. But overall the picture is a rather depressing one of destroyed shareholder value and companies trading below net asset value over the cycle.

For the investor who decides to buy and hold a share in a shipping or oil drilling company the success has therefore depended entirely on the timing of the entry and exit of the investment. Just as the investor in vessels has created his wealth by buying low and selling high, so too has the stock investor. This has made the long only approach of the mutual fund a rather inappropriate way to extract wealth out of this market. First of all the small size of the market has meant that few of the large institutional investors bother to understand the mechanics that drive the sectors and only invest on diversification grounds. Second, with the down part of the cycles being equal in length to the up part, the long only approach means that investments have only benefited from half the cycle. Any such gains are fully wiped out by the next down cycle.

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