Scourge of the Oil Speculators

Money manager Michael Masters, who seeks to rein in oil prices, owns some interesting stocks: GM and airlines

by Moira Herbst

Masters Capital Management's Michael Masters at a June 23 hearing before the oversight & investigations subcommittee of the House Energy & Commerce Committee. Alex Wong/Getty Images

In the halls of Congress, hedge fund manager Michael Masters has become the new face of the antispeculation movement. Testifying with executives from airlines, petroleum marketers, and consumer advocacy groups, the 42-year-old founder of Masters Capital Management has railed against loose regulation in futures trading and argued that speculators have provoked the dramatic surge in energy costs.

"Food and energy price rises really bother me," Masters says. "People don't understand. How many fewer calories should someone in India eat so index speculators can have asset allocations? How many degrees lower does a lady in Maine set her thermostat for these asset allocations?"

On May 20, at the first of three congressional appearances, Masters assured senators that he and his fund do not invest in oil futures. But beyond hunger and frostbite concerns, it turns out Masters has a keen financial interest in lower oil prices: long positions in U.S. airline stocks and General Motors (GM), two industries that have been brutalized by the doubling of oil prices over the past year.

Financial blogger Greg Newton wrote on June 26 that while Masters presented himself as a disinterested party in oil futures, "his hedge fund portfolio is at least knee-deep levered long in U.S. airline stocks and General Motors," citing Masters Capital filings with the Securities & Exchange Commission. "Mr. Masters, protestations of independence and good faith notwithstanding, most definitely has a dog in the energy price witch hunt."

Fuzzy Math?

As of Mar. 30, Masters had large call options in GM; AMR (AMR), the parent of American Airlines; Delta Air Lines (DAL); United Airlines' parent, UAL (UAUA); and US Airways (LCC). Masters Capital also holds stakes in Google (GOOG), newspaper publisher Gannett (GCI), telecom equipment maker Alcatel-Lucent (ALU), and Lennar (LEN), a Florida homebuilder, according to a quarterly SEC filing required of institutional investors with holdings above $100 million. (GM shares fell to a 33-year low, below $12, on June 26.)

Airlines accounted for 20% of Masters' declared portfolio on Dec. 31, 2007; with additional GM shares added in the first quarter of 2008, the fund's "energy-sensitive holdings" came to 30%, Newton wrote. Masters' portfolio declined 35%, from $1.38 billion in December 2007, to $905 million in March, Newton calculated. He cautioned that the SEC filings are "snapshots" that do not reveal any trades around the various positions and that call options' percentage returns "behave differently to the underlying stock depending on the strikes and volatility."

In an interview June 27, Masters called Newton's math "way off," in part because it did not account for offsetting positions, and other options and derivatives not reported on the SEC forms, known as 13F-HRs. He declined to elaborate on the fund's position or overall performance. Masters acknowledged that about 10% of his fund's portfolio is invested in transportation stocks, and says no congressional staff members raised concerns about his fund's holdings.