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Hedge Funds Euro Zone

Hedge Funds Euro Zone

Some Hedge Funds Prepare for Euro Zone Break-up

A potential break-up of the Euro Zone has been keeping some hedge fund managers up at night, wondering how best to protect their funds from this worst-case scenario.  Managers have set about stress-testing their portfolios for this event and looking for ways to minimize their pain if a break-up ever occurs.
With talks on restructuring Greece's debt mountain still deadlocked, and the exit of one of more countries from the euro seen as a small but definite possibility, funds are modelling scenarios ranging from a 50 percent slump in European stocks or a 45 percent fall in the oil price to a 30 percent rise in gold. 
Managers are also trying to dig out old computer programmes they once used to model the behaviour of currencies such as the drachma or the deutschmark as they prepare for an event for which -- even after the 2008 collapse of Lehman Brothers -- they effectively have no precedent. 
Many, having already trimmed risk, are piling into credit default swaps or deeply out-of-the-money options, hoping they pick a counterparty that can withstand the shock of a break-up.
"You can't conceive what this event will be like, but it doesn't absolve you of looking at it," said the chief risk officer at one hedge fund firm who asked not to be named. Source

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