Will Wainewright

25/01/2012 Author: Will Wainewright

Greek tragedy offers more risks than returns

As the Greek government re-opened discussions last week with private sector lenders, who own around $260bn of Greece’s $440bn debt-pile, the mainstream press focused its crosshairs, not for the first time, on the hedge fund sector.

Speculative reports blamed “greedy” hedge fund negotiators for blocking a deal on a Greek debt write-down, with $28bn Och-Ziff Capital Management and $14bn York Capital Management among those named. But were hedge funds to blame?

It is worth remembering that much of the privately owned Greek debt is held by European banks, with France particularly exposed. On top of that, industry sources told HFMWeek that most hedge funds are wary of getting involved in such a politically volatile situation. That appeared to be backed up by Och-Ziff and York, both of whom subsequently denied any involvement in the negotiations, saying their debt holdings were not of any “material” size.

An investment source at a $3bn fund of hedge funds said: “A lot of our hedge funds are terrified. They are unwilling to touch something where the outcome is so unpredictable, and the situation is so politically sensitive.” Some think most funds are waiting for a deal to be struck before acting, with the best opportunities on offer post-restructuring.

Additionally, it is unclear how many funds own Greek sovereign CDS, or if they are actively holding out for a default which would trigger bumper returns – but this would be sure to invoke the wrath of European policy-makers, meaning extracting the profits might not be straightforward, given potential legal issues. What is clear is that risks, not returns, face hedge funds trading around the Greek issue.

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