By Laurence Fletcher LONDON | Fri May 13, 2011 5:42am EDT (Reuters) - Some hedge funds have been left vulnerable to further falls in the oil price after last week's rout, as they continue to bet on a long-term bull run in a market that has seen them rake in billions of dollars in gains in recent years. Funds were badly caught out after going into last week's sell-off with big long positions, having ridden a bull market in oil that began in early 2009. The sell-off, in which oil lost as much as $13 a barrel at one point on Thursday last week and silver posted its biggest one-day drop since 1980, saw big-name funds such as Astenbeck and BlueGold suffer double-digit losses over the week. Nevertheless, many managers are still upbeat because they think the drivers behind oil's rally -- growing global demand and a lack of spare production capacity -- are still valid, investors say. "We don't see anyone changing their view fundamentally on oil or commodities after that one week," said Morten Spenner, chief executive of fund of funds firm International Asset Management, in an interview this week. "The way the market traded, it looked like people were panicky for short-term reasons," said one fund of hedge funds executive who asked not to be named. So far, however, staying upbeat looks to have had mixed results. Oil rebounded on Monday and Tuesday but fell $5 a barrel on Wednesday and was down again on Thursday after the International Energy Agency cut its global demand forecast and China raised banks' reserve requirements ratio. RISK MANAGEMENT However, commodity funds -- which can bet both on rising and falling prices or offset a long position in, for instance, oil against a short position in natural gas -- have trimmed these 'long' positions to prevent further big losses and comply with internal risk limits, investors say. Such a move means they are less sensitive to changes in the price of oil but would still suffer if the price fell or profit if it rose, although to a lesser extent than before. "They're all swinging into risk management mode," said IAM's Spenner. Chris Manser, global head of hedge funds at Axa Investment Managers, said: "You'd expect managers to react by cutting exposures. At the same time, the discretionary managers we've spoken to maintained their general net long positions given that the fundamentals haven't changed." Meanwhile, some computer-driven CTAs (commodity trading advisers), also known as managed futures funds, which bet on market trends, have also maintained their positive exposure. These computer-driven funds, which can be vulnerable to sharp changes in market direction, were also hit during the sell-off -- Winton Capital's main fund lost 2 percent on Thursday while Man Group's (EMG.L) AHL fund lost 4.8 percent in the week to May 9. Funds of funds managers say that the CTAs that follow longer-term market trends have in general cut back their exposure but remain positioned for further price rises, while some shorter-term funds have sold their positions completely. "For systematic managers it depends on the time frame. Given the strong upward trend in commodities, most of the medium to longer term managers were running healthy net long positions which will not have changed significantly due to the sell-off," said Axa's Manser. (Twitter: www.twitter.com/reutersfletcher. To read the Reuters Funds Blog click on blogs.reuters.com/fundshub; for the Global Investing Blog click here)

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