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Hedge-Fund Losses Show Euro’s Drop Fails to Benefit All Traders


Date: Wednesday, March 10, 2010
Author: Bloomberg

Hedge funds that trade currencies are taking hits from politicians casting them as speculators out to sink the euro and push Greece into insolvency. They are also losing money.

Macro funds, so named because they try to profit from macroeconomic trends, fell 1 percent in the first two months of the year, according to data compiled by Chicago-based Hedge Fund Research Inc. Brevan Howard Asset Management LLC, Europe’s largest hedge-fund firm, Moore Capital Management LLC and Tudor Investment Corp. were among those reporting fund losses.

The euro dropped 4.8 percent against the dollar in January and February, while the British pound tumbled 5.8 percent and the cost to insure Greek government debt rose by a third through the beginning of February. Still, macro managers said the lack of sustained moves in markets they favor, such as developing- country stocks and commodities, made it difficult to profit.

“You can’t put on conviction trades in this environment,” said Philippe Bonnefoy, chairman of Cedar Partners Investment Management Ltd., using an industry term for big bets. “And if you can’t do that, and you are a long-term investor, you aren’t making money.” Geneva-based Cedar Partners focuses on short- term macro trading.

The euro’s decline was sparked by concerns that Greece would default on its debt. The pound fell because Britain’s record budget deficit of more than 12 percent of gross domestic product is about the same as Greece’s. Britain also must hold an election by June that could result in the first minority government since 1974.

Papandreou, Sarkozy

Government officials and regulators haven’t cited any specific funds as targeting the euro or Greek debt. The German financial regulator, BaFin, said March 8 that market data didn’t show that credit-default swaps were used to speculate against bonds issued by Greece, contradicting claims by the country’s prime minister, George Papandreou, and French President Nicolas Sarkozy that CDS trading has exacerbated the debt crisis.

Officials at Brevan Howard, Moore and Tudor declined to comment.

Brevan Howard and Moore each told investors last month that they weren’t betting on a Greek default.

“We had no short Greek debt or CDS positions by mid- December,” London-based Brevan Howard said in a Feb. 22 report to shareholders. It had “an overall small net long credit bias over the course of this year.” A short is a bet a security will fall in price. A long position pays off if a security rises in price.

Attention, Denunciations

“We are expecting the European authorities to move beyond uninformed blame-casting and begin bailing out Greece,” Louis Bacon Moore, founder of New York-based Moore Capital, wrote in a Feb. 19 letter to clients of his Moore Macro Managers Fund Ltd.

Trading in currencies and the creditworthiness of Greece, Portugal and Ireland has drawn denunciations from politicians in Europe and the attention of regulators there and in the U.S. The U.S. Department of Justice has sent notices to hedge funds asking them to save their records on euro trading.

Papandreou on March 8 criticized “unprincipled speculators” who he said have roiled markets and threaten a new global financial crisis.

“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” he said in a speech in Washington.

Commission to Investigate

The European Commission said it will investigate wagers in sovereign CDS, which act as insurance against defaults, in the wake of the Greek crisis.

Macro funds have told investors they aren’t sure whether the economies of the developed world are growing or shrinking, or whether inflation or deflation is on the horizon.

“We continue to believe that the macro environment is highly unstable,” Alan Howard, chief investment officer of Brevan Howard, which oversees $23 billion, wrote in a Feb. 1 letter to shareholders. “I do not think we have ever had a situation where two diametrically opposed potential outcomes, a deflationary bust and an inflationary spiral, can be credibly argued with equal conviction.”

The net asset value of the firm’s publicly traded BH Macro Ltd. fell 1.6 percent this year through February.

Howard said he expects some emerging-market economies may grow faster than those of the world’s richest countries. He also said investing in emerging markets could be risky because many funds are making the same trade.

“Any challenge to the global growth story could cause a sharp and painful correction,” he wrote.

Moore, Tudor Returns

Bacon, whose firm oversees $14.6 billion, told investors in a letter last month that he sees higher growth in emerging markets, China and India than in developed nations. Bacon didn’t say whether he was trading in emerging markets.

His biggest fund, Moore Global Investment, fund fell 0.79 percent this year through February.

Tudor BVI, the largest fund of Paul Tudor Jones’s $10 billion Greenwich, Connecticut-based Tudor Investment, dropped about 1 percent through March 5.

Investors have been whipsawed on many trades this year.

The MSCI Emerging Markets Index is little changed through yesterday after falling almost 6 percent in January. The Standard & Poor’s 500 Index, a benchmark for U.S. stocks, fell 3.7 percent in January and has jumped 6.2 percent since. Gold gained 2.4 percent this year after falling 2.7 percent through early February.

Peter Thiel, head of San Francisco- and New York-based based Clarium Capital Management LLC, is wagering on deflation.

Less Optimism

He had almost no currency holdings as of the end of February, and his biggest bets were that U.S. debt and foreign debt will rise and domestic equities will fall, according to a report sent to clients. His fund gained 0.8 percent through February.

Macro funds on average became more optimistic last week on the S&P 500 and commodities, according to a March 8 report by Mary Ann Bartels, an analyst at Bank of America Merrill Lynch in New York. Macro managers went from betting on a rise in the price of emerging-market securities to a small wager that they would fall.

“I don’t think market trends will become clear until sometime in the third or fourth quarter,” said John Trammell, chief executive officer of New York-based Cadogan Management LLC, which farms out money to hedge funds.

One indication of stronger growth and rising inflation will come when the Federal Reserve decides to raise rates. Data on futures trading compiled by Bloomberg suggest there’s a 57 percent chance that policy makers will raise their target rate for overnight loans between banks at their November meeting.

In the meantime, managers making short-term trades will be more likely to make money as markets seesaw between bullish and bearish stances, Trammell said.

“Traders have opinions, but they aren’t held up by much conviction,” he said. “There are a lot of people who are macro bearish, but who are fully invested bears, and a lot of people who are bullish but have taken off a lot of risk.”