* Short positions on Greek bonds rise in Jan, Feb
* Talk that some funds take profits, play CDS convergence
* Funds hedge exposure to euro, cut back risk (For more Dealtalk columns, please click on [DEALTALK/])
By Laurence Fletcher LONDON, Feb 19 Hedge funds have increased their bets this month on Greece's economic woes by shorting its bonds or buying default protection, although anecdotal evidence suggests some have cashed in after recent gains.
Even hedge funds without direct exposure to Greece have been insulating their portfolios against collateral damage in the currency or credit markets, as concerns over Greece's ability to service its heavy debt have grown.
"There's been a lot of interest in sovereign risk, we've just had a client call now," said one prime brokerage executive who declined to be named.
Figures from Data Explorers this week show rising short positions on Greek sovereign bonds, indicating funds have either been directly shorting bonds or buying CDS (credit default swaps, which pay out in the event of default) from banks, who usually hedge their exposure by shorting the bond themselves.
Short positions -- as measured by the proportion of bonds available for lending that have actually been borrowed -- have risen to 9.82 percent from 9.58 percent at the end of January and 8.24 percent at the end of December.
To short sell, a fund will borrow a security for a fee and sell it on the open market, hoping to later buy the same securities at a lower price and pocket the difference after returning them to the lender.
The rise is likely to be driven both by an increase in short positions from global macro funds, which bet on equities, bonds, interest rates and other markets, and also by people selling the bonds, which reduces the available pool for lending.
The yield on the benchmark 10-year Greek bond has risen to 6.5 percent from 5.8 percent at the end of December and 5 percent at end-November. For a FACTBOX on Greece's fiscal troubles, click on [ID:nLDE60R2R7]
HEDGING THEIR BETS
Despite the rise in short positions, there is also anecdotal evidence that some funds have taken profits after a CDS spike.
Spreads on five-year Greek CDS more than tripled since end-October to a record of around 420 basis points this month, although they have since come in to 359 basis points.
"There was a group of probably hedge funds and prop traders that bought the CDS when it was still trading reasonably favourably, it blew out, and they sold them," said David Carruthers, head of quantitative services at Data Explorers.
Some funds may now even have started shorting Greek CDS -- which can be done via an agreement with a bank -- and have bought other, cheaper CDS, such as Spain which is at 133 basis points. "I've heard of hedge funds shorting Greek CDS and buying Spanish CDS and playing the convergence," said Pedro de Noronha, managing partner of London-based Noster Capital.
Nevertheless, many hedge funds, particularly those in credit strategies or equity funds with large exposure to the euro, have acted to hedge exposure to the single currency, which sank to a nine-month low against the dollar earlier this week as speculation about its future has grown.
"Some of our equity clients are hedging out their risks to the euro at the moment," said Nick Roe, global head of prime finance at Citigroup.
Noster's de Noronha told Reuters this month he is "implicitly short" the euro by holding 60 percent of his euro-denominated fund in other currencies and not hedging exposure. [ID:nLDE61B10Y] Many other funds have cut back exposure across the board to avoid market volatility as Greece's crisis unfolds.
"Risk has been taken off the books in January ... quite aggressively. It's very unusual. " said Hans Hufschmid, chief executive of hedge fund services firm GlobeOp GO.L and a former partner at LTCM.
"If you're a credit fund, even if you've got zero exposure to Greece, it will cascade through the credit spreads. You don't have to have exposure. I think it's the reason risk has come off, there's too much uncertainty about the overall impact." (To read the Reuters Hedge Fund Blog click on blogs.reuters.com/hedgehub; for the Global Investing Blog click here)
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