Portfolio Manager Perspectives

Jeff Benjamin

Uri Landesman: How to hedge against Egypt risks

Feb 1, 2011 @ 2:44 pm

By Jeff Benjamin

Investing in North American oil producers and even biotechnology companies are some of the ways to hedge the political unrest in Egypt, according to Uri Landesman, president of Platinum Partners LP, a $500 million hedge fund shop.

“As the price of oil goes up, it makes the reserves of North American producers that much more valuable,” he said.

While Mr. Landesman remains hopeful that Egyptian president Hosni Mubarak will step down peacefully after 30 years in power, he said it doesn’t hurt to add some non-correlated exposure.

“At this point it seems like people are realizing that last weekend [in Egypt] was not as bad as they had feared, and people are still hoping that a more moderate government takes over,” he said. “But there are still risks that the protests continue to spread and it gets more violent, and that could lead to a disruption in oil delivery.”

The big delivery concern centers on the Egypt-controlled Suez Canal, which handles 8% of all global sea trade and 2.5% of all global crude oil.

In terms of hedging that risk, Mr. Landesman cited North American producers Whiting Petroleum Corp. Ticker:(WLL) and Suncor Engery Inc. Ticker:(SU) as less-correlated energy investments.

Another strategy, he said, is to build up exposure to alternative-energy sources such as ethanol and corn through Archer Daniels Midland Co. Ticker:(ADM) or Monsanto Co. Ticker:(MON).

Biotechnology, he added, is an unlikely hedge because the category can often trade with risk.

He said, however, “as individual companies, biotech tends to have little correlation to oil or the stock market as a whole.”

Like a lot of investors, Mr. Landesman views some of the market dips related to the unrest in Egypt as a buying opportunity.

However, he can also appreciate the fear some investors might be experiencing.

“Investors want certainty, so to spin this as something positive is impossible,” he said. “It is always difficult, when you’re in the middle of something, to fully appreciate its significance, but this is something to watch very closely.”

Mr. Landesman said there is a risk that the Egyptian government could ultimately become a theocracy like Turkey and Lebanon.

“The majority of the 21 Arab countries in the Middle East have been theocratized,” he said. “It’s possible that, like Lebanon, radicals will join the government in Egypt and end up taking over, and Lebanon would be the worst blueprint for Egypt.”

Ultimately, he added, the odds of a war in the Middle East have “gone up substantially” with the uprising in Egypt.

“Investors are hopeful and they appear focused on last week’s positive economic data,” he said. “But at the same time, every country that has not yet had rioting in the streets is doing everything possible to avoid it.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.


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