Hedge Funds Weather Greek Crisis

By Laurence Fletcher 

        Hedge funds slashed bets on European stocks ahead of the latest developments in the Greek debt crisis, a move that has helped them limit the impact of a downturn in the markets.
        The surprise outcome of Sunday's Greek referendum sent equity markets tumbling, with the Stoxx Europe 50 shedding about 1.1% Monday. Some investors expect the country's rejection of terms offered by its creditors will lead to further protracted negotiations, a deeper debt crisis, and, possibly, Greece's ultimate exit from the eurozone.
        Alex Altmann, head of equity trading strategy for Europe, the Middle East and Africa at Citigroup Inc., said that hedge funds had cut bets on European stocks rising "without a doubt" in recent weeks as the crisis escalated.
        Mr. Altmann said that net exposure to European stocks is now low among hedge funds. He said many equity hedge funds may have halved net exposure to the region's stocks in the run-up to the referendum.
        Hedge funds are looking to protect gains chalked up earlier this year, when European shares soared on the back of the European Central Bank's quantitative easing program. The ECB's more than EUR1 trillion ($1.1 trillion) stimulus program drove the Stoxx Europe 50 index up as much as 20% by mid-April.
        Equity hedge funds were up 4.99% in the first five months of this year, according to data from Hedge Fund Research, while hedge funds overall were up 3.87%.
        The S&P 500 index was up 3.23% over the same period. Both equity funds and hedge funds overall have lagged behind the U.S. market for the past six calendar years.
        Macro funds, which bet on bonds, stocks and currencies, and computer-driven trend-following hedge funds, using derivatives scaled back bets that European markets would rise by almost one-third since the start of April, according to data from Credit Suisse.
        Equity hedge funds also cut bets on rising stocks in late June, the data show.
        London-based equity hedge fund Pelham Capital had a net exposure--bets that stocks would rise minus bets they would fall--of around 85% at the end of May, according to a letter to investors reviewed by The Wall Street Journal. The fund, which manages approximately $4 billion in assets, is one of the world's top-performing hedge funds this year, having gained 17.5% in the five months to May, although it made a small loss in June.
        A Pelham spokesman said that the fund had bought out-of-the money options, which pay off if there is a large market move, to protect it from a selloff.
        According to the investor letter, if the market fell 5%, then the fund would lose just over 5%. But if the market fell 20%, then the fund would lose just 8.5%.
        Other European equity funds are racking up gains. Man Group PLC's GLG European Long-Short fund is up 5.0% this year to July 3, according to data from the company. At London-based Lansdowne Partners, one of the world's biggest equity hedge funds, the $500 million European Equity fund gained 1.7% last month to June 26, taking gains this year to 8.5%, said a person who had seen the numbers. Its flagship $10.7 billion Developed Markets fund is up 4.6% this year, after gaining 2.8% in June.
        Some European equity funds have been cautious since the start of the year, partly because of the prospect that the potential for U.S. interest rates to rise could limit equity market gains.
        Anne-Sophie d'Andlau, co-founder of Paris-based hedge fund CIAM, said she had bought put options--the right to sell stocks at a predetermined price--on the Stoxx Europe 50 at the end of January to hedge the part of her portfolio exposed to stock market moves.
        Ms. d'Andlau said she saw "an accumulation of risks" for stocks including rising U.S. rates, "which I don't think people are really prepared for."
        "We're prudent about the evolution of the market in the next six months. We're realistic about the number of risks there are around," she said.
        (END) Dow Jones Newswires

        July 07, 2015 07:05 ET (11:05 GMT)

#FX
#SaleForex
#HedgeFunds
#WeatherGreekCrisis
#Forex
#MacroFunds
#WallStreetJournal