U.S. Said to Tell Hedge Funds to Save Euro Records

Date: Wednesday, March 3, 2010
Author: Bloomberg

The U.S. is asking hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests, as Europe and the U.S. step up scrutiny of the funds’ role in the Greek debt crisis.

The Department of Justice sent requests to save the records to at least some of the hedge funds whose executives attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co. on Feb. 8, said the person, who declined to be identified because the information is private.

The European Commission said yesterday it will investigate trades in sovereign credit-default swaps in the wake of the Greek crisis, which has pushed the euro lower and prompted officials to warn hedge funds they shouldn’t try to profit from the woes of the region’s nations. One of 23 themes discussed at the Feb. 8 dinner was a wager that the euro would fall against the dollar, according to an agenda obtained by Bloomberg News.

“It is clear in the current environment, and likely for a long time going forward, any entity that profits from another’s misfortune, in this case hedge funds versus Greece and the euro zone, risks being the target of public backlash, or worse, government retaliation,” said Kirby Daley, a senior strategist in Hong Kong with Newedge Group’s prime brokerage business.

Aaron Cowen, an executive at SAC Capital Advisors LP, David Einhorn, head of Greenlight Capital LLC, and Don Morgan, who runs Brigade Capital Management LLC, attended the dinner, as did a representative from Soros Fund Management LLC, the Wall Street Journal said Feb. 25.

Greece’s Woes

Spokespeople for the hedge funds declined to comment or didn’t return calls seeking a comment. Neil Crespi, president of Monness Crespi, couldn’t be reached for comment. Gina Talamona, a Department of Justice spokeswoman, declined to comment. The requests were reported earlier yesterday by CNBC.

The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, rose to 396 basis points on Jan. 28, the highest level since the start of the euro in 1999, making it more expensive for the country to sell new bonds. Sovereign credit-default swaps, used to insure against default, rose to a record last month.

European officials have said the contracts can fuel speculation that may distort market perceptions. The German Finance Ministry said this week the over-the-counter products must be reviewed following the reaction of financial markets to the Greek debt crisis. French Finance Minister Christine Lagarde has said she wanted politicians to take a united approach against “speculators” betting on government bond defaults.

Greek Exposure

Credit-default swaps traders aren’t to blame for the sharp rise in Greek government bond yields because their exposure to the securities is minimal, Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California, said last week. The notional value of credit swaps on Greece is about $9 billion compared with $267 billion of government debt, as reported by the Depository Trust & Clearing Corp.

“Currencies will almost always reflect the underlying health of the economies they represent,” said Ed Rogers, chief executive officer of Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K. “The recent movements of the euro most likely reflect fear of sovereign defaults across Europe.”

U.S. politicians plan to hold a hearing on the role that investment banks including Goldman Sachs Group Inc. may have played in Greece’s debt crisis. Federal Reserve Chairman Ben S. Bernanke said on Feb. 25 that the U.S. central bank is reviewing derivatives contracts arranged between Goldman Sachs other investment banks with Greece.

Budget Shortfall

The woes of Greece, which has to finance the euro region’s largest budget shortfall, and concern they may spread to other countries have dragged down the euro, which has tumbled about 10 percent since Nov. 25. It traded at $1.3610 at 8:45 a.m. in London.

Futures traders last week placed the biggest bets on record that the euro will fall against the dollar. The number of wagers by hedge funds and other large speculators for a decline in the 16-nation currency rose on Feb. 23 to 71,623 contracts more than those anticipating a gain, according to Commodity Futures Trading Commission data. It was the fourth consecutive week that the amount climbed to a record.

Even if the Department of Justice decides to request the records it has asked the hedge funds to save, that doesn’t necessarily mean that the managers will be investigated, said Jedd Wider, a partner at law firm Morgan, Lewis & Bockius LLP.

Bullish on Canada

Other ideas discussed at the dinner, which took place at the Townhouse, a private facility run by restaurant Park Avenue Winter, were bullish bets on the Canadian dollar and Philip Morris International and bearish wagers on Wells Fargo & Co. and Bank of America Corp.

“The big issue is whether the meeting was informational, and these various traders were simply responding in a parallel way to a common set of facts,” which would be legal, said Herbert Hovenkamp, who teaches antitrust law at the University of Iowa College of Law in Iowa City. “What’s not legal is for people to agree to trade at a particular price or against the euro to devalue it and start a stampede that devalues it further.”

Louis Bacon’s $14.6 billion Moore Capital Management LP and Brevan Howard Asset Management LLP, Europe’s largest hedge-fund firm, have rejected speculation they’re trying to benefit from Greece’s woes.

Bacon told investors in a Feb. 19 letter that he isn’t betting on a Greek default because European authorities will probably bail out the country. Moore has a net long duration position in Greek bonds, meaning it will benefit from a uniform decline in interest rates across the yield curve.

Brevan Howard said in an investor letter for the $22 billion Brevan Howard Master Fund that it hasn’t been betting against Greek debt since mid-December and has “no meaningful positions” through bonds or credit default swaps in Greece, Italy or Portugal.