Grexit Fears Risk Derailing Best Start by Hedge Funds in Six Years

Jun 29 2015 | 6:37pm ET

(Reuters) - Greece's worsening debt crisis threatens to derail the best start to the year for global hedge funds since 2009, as a bitter standoff between Athens and its creditors rattles financial markets.

Hedge funds returned 4.6 percent through the end of May, the highest during the same period in the last six years, data from industry tracker Eurekahedge showed. Those focusing on Europe did better, gaining 6.3 percent.

But capital controls and a week-long closure of Greek banks and the Athens stock exchange have raised concerns over possible euro zone contagion and cast doubts on a sustained European stock rally following the European Central Bank's asset purchase program.

Greek lawmakers on Sunday authorized a July 5 referendum that will let the people of Greece vote yes or no on creditor demands for economic reforms. Greek Prime Minister Alexis Tsipras, leader of the leftist Syriza party, called for the referendum, which some analysts have said amounts to a decision whether or not to remain in the euro zone.

Some big-name U.S. hedge funds, including John Paulson’s Paulson & Co, David Einhorn's Greenlight Capital, and Daniel Loeb’s Third Point are invested in Greece, investors said on condition of anonymity.

Representatives for Paulson and Einhorn said their exposure is minimal. Third Point did not return emails and calls seeking comment.

While direct exposure to Greece in hedge fund portfolios is small, the crisis will have wider implications leading to the fall in European equities and widening of peripheral bond spreads, industry experts said.

"Like a bad marriage, too much has now been said for Syriza and Europe to continue," said Rebecca Healey, consulting analyst at TABB Group. "The levels of acrimony and mistrust are unlikely to produce a credible solution."

Data from Lyxor, which replicates strategies of funds managing more than $200 billion, showed a compact range of hedge fund trades linked to Greece, with exposure ranging from one fund betting 5.6 percent of its assets on Greek stock values going up and a second fund betting 4.5 percent of its assets on a likely decline in the value of Greek sovereign bonds.

Only 11 of the 60-plus hedge funds tracked by Lyxor had direct exposure to the country, Lyxor said. And, it added, few had struck bets with a view to cashing in on the turmoil, confounding some assumptions that opportunistic hedge funds would swoop on the distressed markets in droves.

"At present no fund is positioned opportunistically, i.e. to take advantage of the situation," said Philippe Ferreira, head of research at Lyxor.

Ferreira said some event-driven strategies and those betting on the direction in stock prices might suffer.

IN OR OUT?

While many managers have scaled back direct exposure to Greece since its debt troubles began, those still betting are running high-conviction positions ranging from sitting out in cash to hedging their bets or piling heavily into a one-way punt.

"There are some recent dedicated Greek credit funds but other than them and some distressed funds that may be making big bets on Greece, most hedge funds don’t have big exposures," said Michael Hennessy, managing director at Morgan Creek Capital Management, which invests with dozens of hedge funds.

Many hedge funds that bet on long-running macro-economic trends were also predicting an upturn in European stock prices before today, but industry sources said the negative impact may be offset by long bund and short EUR/USD bets.

Fabrizio Biondo, chief investment officer at $1 billion Swan Asset Management, said a 'yes' vote is still more likely than a 'no' vote, given the majority of Greeks want to remain in the euro zone, even with more austerity measures.

Swan has bought corporate bonds of Titan Cement and Hellenic Petroleum, even though he feels that extended capital controls will put the economy under strain.

"If a 'no' vote prevails, we now think that 'Grexit' will become very likely, so for now we are holding our small positions," said Biondo.

"We are keeping our long dollar and bund positions which are clearly positive contributors to the performance today."


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