Hedge Funds Euro Zone Returns
Why Haven't Hedge Funds Been Able to Thrive in Euro Turmoil?When the markets are in turmoil, there seems to always be a few hedge funds making a killing while everyone else is struggling. Take the housing bubble, when John Paulson and a few other talented hedge fund managers made huge returns by shorting subprime mortgages. Now, as the markets are certainly in turmoil over the Euro Zone crisis, there has yet to be a clear winner in the hedge fund industry. The Economist asks why.
Dejected hedge-fund managers blame political meddling for their flagging performance. Last year several battered European countries, including Italy and Spain, banned short-selling of financial stocks, which cut off one route to winnings. On July 23rd Spain and Italy put in place new short-selling bans, frustrating bearish hedgies everywhere. Uncertainty has made many funds nervous about placing big bets. Confusion over whether a Greek sovereign default would trigger payouts on credit-default swaps (CDSs) scared off many funds, for example.
Market trends have also struggled to gather steam because of political interventions. Usually funds add to a small position as a trend gains momentum, but this strategy has not worked in Europe. Markets have whipsawed in response to announcements in Brussels: managers who have a good month often suffer the next. Shorting the euro, an obvious trade for euro bears, has not worked because the currency has not yet tanked, partly because of a rush for Bunds.
Appearances have mattered, too. Few want to incite a political backlash by being seen to profit from Europe’s woes, which is partly why funds are “in risk-aversion mode”, says Dominic Freemantle of Morgan Stanley. Investors are also gun-shy. Few would want a fund to take on the tremendous leverage (and volatility) required for a triple-digit pay-off like Mr Paulson’s, says Marc Lasry of Avenue Capital, a $12.5 billion hedge fund. Source