* 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
"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
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