Hedge funds that have bet on Greek government bonds and banks stocks look set to face some near-term losses, but, despite acute concerns at the start of the week, they say careful management of the risk of investing in the market may yet yield gains if Greece and the EU can agree a long-term solution to the fiscal crisis.
Hedge funds have made forays into Greece for the last two years, seeking opportunities in situations carrying more risk than traditional investors accept.
Third Point’s Dan Loeb started the Hellenic Recovery Fund in 2013, and Randy Smith, who runs Alden Global Capital, started a Greek fund in December 2014.
John Paulson invested in Greek bank stocks, while Perry Capital and others reportedly purchased Greek debt.
Risk-taking is the primary order of business at major hedge funds, and as investors put the Greek situation into perspective this week, the potential for near-terms losses on Greek positions appears to be part of the lumpy return profile many hedge funds generate as they search for big winners.
Hedge funds are at the sharp point of the Greek spear.
Many have bet that Greek politicians and EU technocrats will avoid a Grexit.
Since late 2014, for example, Greenlight Capital, the fund managed by founder David Einhorn, has discussed Greece at several investment forums.
The firm has reportedly been one of the largest investors in Greek bank stocks.
In a conference call this spring, Einhorn indicated that the firm invested in Greek bank equity through warrants to minimise its cash exposure while preserving potentially significant upside participation.
“There’s a wide range of possible outcomes there relating specifically to our position,” he said.
“There’s a lot of leverage to the upside if the situation resolves favourably and the warrants go into the money.”
A spokesman for the Greenlight hedge fund declined to comment on the firm’s Greek positions.
While a Grexit is not inevitable, fundamental changes are taking place; the current crisis will reshape the Greek economic and political landscape, as well as the broader EU financial order.
Greek prime minister Alexis Tsipras may have pushed EU, German and IMF officials too far, says Don Steinbrugge, managing partner at alternatives consultancy Agecroft Partners.
“It’s very, very sad for the Greek people,” he said.
Greek equity and fixed income markets are going to have difficulty attracting capital, and while a buying opportunity could exist several months from now for long-term investors, adjustment to the financial situation will be difficult for Greek markets and citizens, he said.
With the country having missed a €1.6bn payment to the IMF on Tuesday night, Greece is technically in default.
Steinbrugge said: “You’ve got to take a fairly hard line. If you forgive Greece, there are going to be a lot of other countries that want to be forgiven also.”
Traditional investors took this week’s breakdown in talks between the EU and Greece in stride.
Jack Ablin, CIO at BMO Private Bank, said a Greek default would probably not trigger a global financial crisis.
While Greece’s €250bn in debt “is nothing to sneeze at”, he said more than three-quarters of it was held by international bailout funds, with private investors holding only €38bn of Greek government bonds, down from €150bn following a write-down and debt swap in 2012.
With debt talks in limbo until after Sunday’s referendum on creditors’ terms, Greece now looks likely to miss a much bigger, €3.5bn repayment to the European Central Bank due on 20 July, and ratings agency Fitch says it views a default on government debt held by private creditors as “probable”.
While the outcome remains to be seen, Ablin said, “we have to suppose that, after reading the headlines for four years, the people owning such speculative debt are hedge funds comfortable that their bonds are not of the Procter & Gamble sleep-at-night variety”.