Hedge fund managers are sifting through the rubble of the deepening Greek debt crisis to find money-making opportunities, though political uncertainty makes it a risky business.
Executives at the annual GAIM conference in Monaco said they were eyeing Greek sovereign or corporate debt, while emerging markets also offered a safer haven away from worries that the euro zone is close to its first sovereign debt default.
"It's certainly a great chance to make money, from the perspective that it's dynamic and rapidly changing, but the political risk is huge," Robert Marquardt, founder of fund-of-hedge-funds firm Signet, told Reuters on the fringes of the conference.
His comments came as Greek Prime Minister George Papandreou's cabinet survived a confidence vote late on Tuesday, following a euro-zone ultimatum that it must approve tough reforms or miss out on a 12 bln euro ($17.2 bln) aid tranche it needs to avoid bankruptcy.
"With some Greek debt trading at 40 cents on the dollar, you can assume that recovery value over one or two years will be greater than that. You can hedge that by being short Spain or Portugal — somewhere that's not really in play," he said.
Marquardt added that some funds had bought one year Greek debt and keep short positions on three or five year debt, while others short the euro against the Brazilian real or Korean won. Investors profit from "going short", an effective reverse trade, if the value of assets fall.
Better Capital Chairman Jon Moulton said the crisis could present opportunities for both hedge funds and private equity.
"If Greece defaults, whether now or in one year or so, there will be a real chaotic period and kinds of opportunities will surface you hadn't really thought about," he told Reuters.
"Plausibly, that will result in a lot of financial institutions finding themselves short of capital, and you'll find quite a few things being sold rapidly, and private equity would have the funds to play when other people don't.
"Some of the hedge funds could also play in the same area, as banks have to shrink their balance sheets in a rush to replace the capital they used to call Greek debt."
EURO RISK
The euro rose to around $1.4435 on news that Papandreou's cabinet had won its vote, but later retreated and last stood at $1.4381 in late morning trade on Wednesday.
However, as hedge funds seek ways to profit from the crisis, or at least protect their positions, the popular trade of shorting the euro may not be a safe bet, said Gavyn Davies, chairman of Fulcrum Asset Management.
He said that if the crisis eventually forced some of the most indebted countries out of the single currency, the euro might end up as a "sort of pseudo-Deutschmark".
"When I think of selling the euro to hedge a blow-up, I'm slightly put off because I might end up owning the currency that goes up most after the blow-up," he told the conference.
Executives also see opportunities in emerging markets that have emerged from the previous Asian and Russian financial crises in the late 1990s and are now viewed by some as a relatively safe haven from the euro zone's woes.
"Emerging markets start off in a much better place if we have a downturn in the global economy and a reversal in commodity prices," said Jens Nystedt, global strategist at Moore Capital.
Peter Clarke, who heads Man Group , the world's biggest listed hedge fund manager, said one way investors could play the crisis was to invest in emerging market hedge funds.
"You (could) basically say I need to be exposed to markets that are less exposed to macro shocks. What's happening at the moment … is that the macro events are swamping the fundamental analysis of GDP growth or corporate performance," he said.
"We're seeing a lot of money go into emerging markets and emerging market currencies," he told Reuters.
