In the hunt for hedge funds profiting from the Greek crisis and the contagion spreading into Spain, Portugal, Greece, Ireland and the euro, the obvious candidate has been ignored.
Mark Hart, based in Fort Worth, Texas, was the first to set up a dedicated fund to bet on problems within the eurozone, at the end of 2007.
His European Divergence Fund, run in partnership with GaveKal, the Hong Kong-based analysts who have a separate joint venture with London’s Marshall Wace, has done fabulously well from the crisis thanks to its early bet that the eurozone was unstable.
“The thesis was that European credits should not all be trading as if they were one, because they have divergent economies,” says one investor. “On top of that the conditions [for entry] were fudged.”
This is what GaveKal said, back in 2007 (pdf), with rather good foresight.
Our biggest problem with the Euro has always been: what will the ECB do when the economies start to diverge? Today, all of the leading indicators of the PIGS countries are going down (and real estate there is really starting to tank), while the leading indicators of Rhineland are still OK (though not great). Interest rates are probably fine for Holland, Belgium, Austria, Finland…, but already far too high for Italy, France and probably Spain…. So what should the ECB do?
The contradictions behind the creation have been papered over in recent years by the fact that liquidity was plentiful, global growth was booming, and governments could increase their spending at will with little price to pay in the market. However, now that this situation is reversing, could we start to see some of the cracks in the European edifice appearing in broad daylight?
Corriente used CDS to bet that the bonds of weaker countries would move away from Germany’s, positioning the fund to make big money when the market finally realised that different countries carried different risks – as Greece is demonstrating in spectacular fashion.
As a result, Corriente has made double-digit returns for each of the past three months, and remains up this month even after hopes of a bail-out led Greek bonds to recover some ground, according to my sources. If Greece ends up defaulting, or if a rescue can be counted as a default under the terms of the CDS, the fund will rake in monster profits.
My efforts to get hold of Hart or his colleagues this week were unsuccessful, as he was out travelling and his number two’s answerphone was full (maybe rivals wanted tips).
But last time I spoke to him he was keeping his head down, trying to avoid attracting publicity for what will inevitably be a politically-charged decision to try to profit from a crisis in the euro. European politicians are already highly sensitive, with Spanish ministers blaming an international financial and media conspiracy – rather than the state of its economy – for the troubles of its own sovereign debt. I can see why Hart wants to stay out of this debate. At least one other large hedge fund has already decided discretion is the better part of valour and closed out all its bets on eurozone problems to avoid a political backlash.
However, politicians should be listening more carefully to what the speculators say. Hart, together with Kyle Bass at Dallas-based Hayman Capital Partners, spotted the subprime crisis looming and set up a dedicated fund to profit from that, too – raking in very large returns (it made 69% in a month when the subprime crisis first hit, and had a bumper year, making more than 500%). Politicians and regulators should stop attacking the hedge funds, and treat their trades as flashing red danger signs.