Wednesday, March 03, 2010

Hedge funds raise bets against euro

Hedge funds raise bets against euro
By Sam Jones and Brooke Masters
Copyright The Financial Times Limited 2010
Published: March 2 2010 23:32 | Last updated: March 2 2010 23:49

Hedge funds are raising their bets against the euro amid growing fears of a regulatory backlash against their trading positions on the specific sovereign debt of Greece and other weak eurozone economies.

Many of the world’s biggest hedge funds have become increasingly concerned about fierce criticism by European politicians that their country bets have heightened the crisis of confidence in some markets.

Hedge funds such as Brevan Howard and Moore Capital, have concluded that the political and regulatory risks associated with positions against individual countries in the currency bloc were now too unpalatable.

In its most recent letter to investors, Brevan Howard – Europe’s largest hedge fund with around $27bn of assets under management – said that the short trade in eurozone government bonds was “extended, crowded, fully prices the fundamentals”.

The letter added that the trade was “exposed to a regulatory squeeze as occurred on short positions on financial stocks in 2008”. It said the fund has closed out all of its positions on European sovereign debt.

In a recent letter to investors, Moore Capital, which manages just under $15bn of assets, accused EU authorities of “uninformed blamecasting” and said that it currently had no net short position against Greek debt.

Paulson & Co, the $32bn US fund that shot to prominence shorting the US mortgage market last year, has also closed out its positions against Greece, according to people familiar with the situation.

However, market positions against the euro, which on Tuesday hit a fresh nine-month low against the dollar, as a whole are up sharply.

The manager of one multi-billion London-based fund said: “Hedge funds are now expressing the same view on the weaknesses of individual eurozone countries via the euro”.

An estimated $12.1bn of short positions are outstanding against the currency, according to the Commodity Futures Trading Commission. At the beginning of February, there was just over $7bn of short positions it.

Speaking to a parliamentary select committee on Tuesday, Lord Turner said that regulators should seriously consider preventing investors from buying so-called credit default swaps on both corporate and sovereign debt unless they are using it to hedge an existing investment. CDS provide insurance against default of a debt instrument.

While playing down the effect of so-called “naked” purchases of CDS – buying credit default protection without ownership of the underlying bond - Lord Turner said that a ban on speculative purchases “is something that should be discussed”.

He said: “It may be that even if you banned it, it wouldn’t make a big difference [but] there are questions as to whether you should be allowed to take out an insurance contract where you don’t have an insurable interest”.


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