Oil and gas stocks are on track for further strong gains, as a sector shunned by ethically minded investors regains favour, according to the hedge fund manager who made $700mn betting on meme stock GameStop.

Richard Mashaal, co-chief investment officer at New York-based Senvest Management, whose 86 per cent gains in 2021 ranked him among the best-performing hedge funds in the world, said he now has a quarter of his portfolio in fossil fuel stocks.

The shift reflects a push across the investment industry in seeking to profit from the west’s need for secure sources of energy less susceptible to geopolitical risks.

“The result of the ESG movement is that there’s been massive multiple compression [in oil and gas stocks] and we still haven’t come back from that,” said Mashaal, adding that many oil and gas companies had felt that investment capital “wouldn’t be there for them”.

“Now there are other countervailing interests, such as the security of energy supply, that have come to the fore and which are not going to go [away] anytime soon,” he said.

Senvest hit the headlines last year when it emerged as one of the biggest winners from the spectacular surge in GameStop shares. Mashaal, whose firm manages about $3.3bn in assets, had built up a stake of more than 5 per cent in the US retailer in late 2020, before a frenzy of retail investor buying in early 2021 pushed the share price up as much as 2,400 per cent.

Now he believes a surge of funding will be needed in the traditional energy sector to correct years of under-investment.

“You’ve got a couple of years before a meaningful production response can be mounted to satisfy demand. There’s a very solid outlook [for oil and gas stocks] for another year or two,” he said.

Two of Mashaal’s biggest positions in his portfolio are in Canada-based energy groups Paramount Resources and Arc Resources, which he said trade at discounts to US peers. While both stocks are trading at roughly half their all-time highs, hit in 2014 and 2008 respectively, he said they “were earning a fraction [then] of what they’re earning now”.

International oil benchmark Brent crude and US gauge West Texas Intermediate have topped $100 a barrel this year, fuelled by the Ukraine war. Oil traders have warned that prices could soar to more than $200 this year, driven by a growing international boycott of Russia.

In October the Financial Times reported that hedge funds had been buying up and profiting from the shares of oil and gas companies discarded by ESG-focused institutional investors.

“There’s a lot of room for multiple expansion [in these stocks],” said Mashaal, adding that a high oil price had not been fully factored into these companies’ share prices.

“People realise this is not going away in the short or medium term. It’s not like ESG goes away, but we [now] need to balance it with energy security and where you want to buy your oil from,” he said.

If oil is not produced in Canada or the US “then it’s produced somewhere else, where the ESG regulations are less stringent or even non-existent”, he said.