The Wall Street Journal
FEBRUARY 18, 2010
by Gregory Zuckerman and Kate Kelly
Some hedge funds have started to adjust their investment strategies as European officials voice harsher criticism of investors who have used exotic investments to bet against the debt of countries like Greece, traders said.
Elected leaders in France and Germany have highlighted what they view as a potentially destabilizing but largely hidden influence of banks, hedge funds and other investors in the markets for Greek sovereign bonds.
The officials have taken the strongest aim at the use of credit-default swaps, insurance-like contracts that pay out when an issuer defaults, and rise in value as credit conditions deteriorate. One recent report in Spain’s El Pais newspaper said the country’s intelligence service is investigating “speculation” in Europe’s markets.
Some players whose strategy was to purchase credit-default swaps that would pay out in the event of a Greek default got spooked last week by talk that European officials might try to make such swap trades illegal in the future. Though investment strategies are constantly in flux, given the potential precariousness of that market, some hedge funds began shifting toward a more currency-driven strategy, say people familiar with the matter.
On Wednesday, the euro dropped sharply against the dollar, indicating that bearishness toward the European currency might be mounting.
The scrutiny is such that some investors wagering against Greece are becoming tight-lipped, sharing few details about how their trades are faring. Other investors have avoided making any of these trades, citing worry about a potential backlash from politicians and others.
“You can add to the pressure by making these trades, and that made us uncomfortable. We’ve worried about public and government criticism,” says Avi Tiomkin, chief investment officer of Tigris Financial Group, a $2 billion New York investment firm that has been concerned about the health of the euro for more than two years. Instead of buying credit-default swaps to bet against specific countries such as Greece, Tigris has been betting against the euro and buying gold, he says, trades that could do well if debt problems grow for Greece and others.
One sign of strength emerged Wednesday, after the Spanish treasury completed the sale of €5 billion ($6.9 billion) of 15-year bonds. The treasury offered a hefty premium on the deal, but received offers to buy more than €13 billion worth of the new bonds.
Spanish officials are quick to reject comparisons with Greece, where deep fiscal problems are compounded by a history of dubious budget accounting. “As markets see that our diagnosis of the situation is correct and that the measures we are taking are adequate, this offers reassurance,” said Deputy Finance Minister Jose Manuel Campa.
Some of the longtime bears say they have trimmed some CDS holdings to cash in profits as they moved on to buy CDS protection on the debt of the United Kingdom, Japan and other nations that haven’t been the focus of recent concerns.
They have also concentrated their focus on the euro. A wide swath of fund managers and Wall Street traders agree that the euro is likely to fall against the dollar this year. If Greece and other Southern European countries default on their debts, they argue, the perceived weakness in the euro-zone economy will cause the currency to fall. Similarly, moves by European Union officials to bail out a teetering economy like Greece’s could also weaken the common currency.
Operating under the theory that the U.S. is likely to recover from its financial woes faster than Europe will, the large asset-management firm BlackRock Inc. began shorting the euro late last year, according to someone familiar with the matter. At that time, the euro was trading at close to $1.50, which seemed too high to last, this person says.
Other funds that have made recent bets against the euro include the large New York hedge-fund managers Paulson & Co. and Moore Capital Management LP, say other people familiar with the matter. The two firms declined to comment Wednesday.