market folly

Pasco Alfaro's hedge fund Miura Global Management recently filed a 13G with the SEC regarding shares of the United States Oil Fund (USO). Due to activity on June 29th, 2010 Miura now shows a 7.5% ownership stake in the exchange traded fund with 4,241,000 shares. This is a brand new position for Alfaro's hedge fund as they did not own shares back on March 31st, 2010 when first quarter portfolio disclosures were made.

What's interesting here is the fact that the fund has used an exchange traded fund as a proxy for investing in oil rather than directly playing oil futures. Before assessing further, remember that since this is a commodity related investment rather than a stock, the rationale behind the pick might not be what it seems. This could simply be a bullish directional bet on crude oil (in part possibly spurred on by the Gulf oil spill). At the same time, Miura could be using this vehicle as a hedging instrument as they often have various alternative energy plays in their portfolio.

Either way, the fact that they hold such a concentrated position in this crude oil exchange traded fund (USO) is intriguing in and of itself. This is by far the largest pure crude oil position we've seen from the equity focused hedge funds we cover. In the past, we've detailed how to invest in crude oil via exchange traded funds. While that comparison highlights the pros and cons of the various vehicles available to investors, it's surprising to see a prominent hedge fund investing such a large sum in a somewhat flawed exchange traded fund. There are numerous negative aspects to using USO as a proxy for oil, many of which we outlined via an in-depth piece, how contango affects crude oil ETF's. Needless to say, the fact that USO merely buys front month crude oil contracts over and over leaves much to be desired.

So while we don't quite know the exact rationale behind Alfaro's investment for his hedge fund, we do know that USO is a vehicle more-so suited for near-term trading rather than investing longer term. Maybe more than anything they might have selected USO purely for its liquidity as other oil funds are far less liquid on a daily trading basis. We'll have to see if we can glean further information regarding their investment purpose (directional versus hedge) and their investment timeframe.

This is the first time we've detailed portfolio maneuvers from this hedge fund so let's get some background. Miura Global Management is a long/short equity hedge fund founded in 2004 by Pasco Alfaro and Richard Turnure. While Alfaro still manages the firm, Turnure left to pursue an alternative energy endeavor after spearheading many of Miura's investments in that space. Miura grew from $5 million in assets under management to upwards of $3 billion. The hedge fund focuses on cutting edge research, multifaceted risk management, and non-correlated returns. Miura Global is a 'Tiger Seed' hedge fund because it was seeded by legendary Tiger Management hedge fund manager Julian Robertson. As such, the fund is a part of the 'Tiger hedge fund family tree'.

Taken from Google Finance, the United States Oil Fund is "a limited partnership. USOF is a commodity pool that issues limited partnership interests (units) traded on the NYSE Arca, Inc. (the NYSE Arca). The Company’s general partner is United States Commodity Funds LLC (the General Partner) and is responsible for the management of USOF. The investment objective of USOF is for the changes in percentage terms of its units’ net asset value (NAV) to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange (the NYMEX)."

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