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Cleaves Navigates Red Sea Disruptions

Report: Systematic Strategies

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Stockholm (HedgeNordic) – Since the onset of the latest Israel-Hamas conflict in October last year, attacks by Houthi rebels in Yemen targeting cargo ships in the Red Sea have significantly disrupted commercial shipping. The longer routes required to avoid the Suez Canal have increased travel distances for cargo and tankers, leading to soaring freight rates. Cleaves Shipping Fund, an equity-focused hedge fund investing in the shipping sector, successfully anticipated the economic implications of this conflict and positioned its portfolio accordingly. With a 7.6 percent gain in May alone and an 18 percent rise year-to-date, Cleaves Shipping Fund ranks among this year’s ten best-performing hedge funds in the Nordics.

“We have been particularly positive towards product tankers since October last year and especially after the escalation of the Israel/Gaza conflict and the following tensions in the Red Sea,” explains Carl-Sigurd Synvis, Head of Fund Management at Oslo-based Cleaves Securities. The fund’s May performance was notably influenced by the release of first-quarter earnings from many companies in its portfolio. “It appears the market did not fully account for the increased earnings resulting from longer voyages caused by disruptions in the Red Sea and the Suez Canal,” says Synvis. “Most names reported strong numbers. Together with promising forecasts and increased payouts, we saw their share prices performing strongly after numbers were released.”

“We have been particularly positive towards product tankers since October last year and especially after the escalation of the Israel/Gaza conflict and the following tensions in the Red Sea.”

Carl-Sigurd Synvis, Head of Fund Management at Cleaves Securities.

Since the Red Sea tensions began, the team behind Cleaves Shipping Fund has maintained an overexposure to oil tankers, particularly product tankers. “This strategy has been successful, with portfolio names delivering up to 80 percent returns during this period,” says Synvis. As a result, Cleaves Shipping Fund has advanced 23 percent since early October through the end of May this year. In contrast, the MSCI World Index has returned about 21 percent over the same timeframe.

While the Houthi attacks have been a significant contributor to the tight product tanker market, Synvis suggests that a resolution to the conflict could trigger a substantial decline in product tanker rates. Consequently, the fund manager of Cleaves Shipping Fund is more optimistic about very large crude carriers (VLCCs) than product tankers. VLCCs are oil tankers specifically built to carry crude oil in bulk, whereas product tankers carry refined petroleum products. “The earnings of the largest crude oil tankers are less affected by the conflict, or by a resolution to the conflict,” Synvis asserts.

“The earnings of the largest crude oil tankers are less affected by the conflict, or by a resolution to the conflict.”

Carl-Sigurd Synvis, Head of Fund Management at Cleaves Securities.

China’s minimal dependence on the Red Sea or Suez Canal for oil imports supports the team’s conviction. “Looking ahead, market analysts predict that global oil demand will increase by 1.4-1.5 million barrels per day in 2024-25, with over 90 percent of this growth coming from China and other non-OECD countries,” explains Synvis. Although about four-fifths of China’s imported oil comes from the Middle East, shipments bypass the Red Sea altogether by starting from the Persian Gulf. Moreover, the average voyage duration for crude oil imports to these regions exceeds global averages by approximately 45 percent and 11 percent, respectively, providing additional downside protection for freight rates.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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