Switzerland’s Insch Capital launches oil fund

Zug-based alternative investment group Insch Capital Management has launched the Black Gold Fund, a hybrid investment tool to provide secured income investment derived from oil revenues.

The Black Gold fund has a bond-like structure secured by fully proven oil resources, predominantly in Canada. It has a target yield of 9.5% per year paid quarterly with an upside enhancement through oil price participation.

Several groups have voiced concern the oil price could start falling. According to Lombard Odier, fears that oil prices will surge are overdone, despite the threat of Iran shutting the Strait of Hormutz which hosts approximately one third of the global trade in oil.

By contrast, the Swiss group expects crude oil prices to remain volatile as risks to the downside are being underestimated.

Others believe oil prices will continue to rise due to geopolitical pressure. The fund’s name, Black Gold, is a common nickname for oil. Schroders’ multi-asset team recently said it had “become more cautious on gold, which seems to have lost some of its defensive characteristics,” but expressed more positivity about oil.

“Overall we favour energy due to the continued tight supply and with the tension around Iran’s nuclear program supporting the oil price,” the team said.

Insch’s fund aims to provide investors yield protection as long as the oil price is above $66 per barrel. Crude oil is currently trading at $106 per barrel, meaning its price would have to plummet for Black Gold to lose its yield protection.

Insch believes the fund can operate as a hedge against inflation and, although it is an income product, will not correlate with bond markets while avoiding equity market risk.

According to Insch, there are two return drivers for the fund: loan notes (90% of the principal) and a geared oil enhancement strategy (10% of the principal).

Insch said the loan notes represent a diversified portfolio of interests in oil producing properties and are secured by proven oil resources (which are NI 51-101 Compliant).

It believes the geared oil enhancement strategy should provide investors with exposure to potential oil price appreciation. The average five year oil return since 1983 has been 47%, which represents 8% per year. The investment is callable after 24 months at 10% premium.

Christopher Cruden, chief executive of Insch, said “given supply/demand imbalances and geopolitical risk factors, [the oil price] is likely to increase further. Black Gold will be attractive to investors who believe oil price will rise and are seeking a superior risk/return profile with low correlation to other asset classes.”

The fund is structured as a British Virgin Islands limited liability mutual fund and is aimed at professional investors. Minimum investment is $200,000.

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