New York-based hedge fund Greylock Capital has sold most of its Cypriot government bond holdings and may dump the rest, its founder said on Wednesday, as the state of talks between the island and its creditors heighten the risk it will default.
Greylock, well-known for a history of building up positions in risky sovereign bond markets such as Greece and Argentina, has cut its bet on Cyprus by about 75% over the past two weeks, Hans Humes said.
"You're betting for 5 or 10 points (euro cents) at the risk of losing 40 or 50 or more … You have to be really on top of your game with this trade. Cyprus really could default," he told Reuters. He did not disclose the exact amount of the bond holding.
Humes said his fund had added to a small position in a bond maturing in June after its price tumbled on Tuesday ahead of the Cypriot parliament rejecting a plan for a 10 bln-euro ($13 bln) EU bailout linked to a harsh levy on savings, but that the risks of holding on to this were now increasingly high.
"Everybody freaked yesterday. I would say we sell them before the June deadline hits unless things stabilise quickly."
Another fund manager said he has also been trading Cypriot bonds.
Steven Mitra, partner and senior portfolio manager at hedge fund firm LNG Capital, said he owns bonds maturing in 2013 because he expects a bailout to be agreed, and is short longer-dated bonds as he expects those bonds to be restructured in the future.
"Cyprus will be absolutely fine in the short term," he said. "The long end of the curve will come under pressure for PSI (private sector involvement) … I'm playing the spread between them."
Founded in 1997, Greylock runs $600 million in assets and Humes said its position in Cyprus was a small part of the fund.
Hedge fund interest in Cyprus comes after many big names, including BTG Pactual, Third Point and Greylock, profited from a gamble last year that Greek bond prices would surge as the possibility of the country leaving the euro zone receded.
On Wednesday Cyprus was pleading for a new loan from Russia in an effort to avoid a financial meltdown after rejecting the EU bailout. The risk of default and a bank crash has rattled markets and sparked renewed concerns about the future of the euro zone.
Cyprus has around 4 bln euros of sovereign debt, including the 1.4 bln-euro June bond that has attracted the attention of hedge funds, including Greylock.
Gabriel Sterne, a senior economist at broker Exotix, said hedge funds held a "significant" portion of that bond, but believed the price, at around 85% of its face value, was "overpriced".
"The risk (of a euro zone) exit is significantly high and I am a short," he said, predicting that the bonds could fall to 20 to 25 cents of their face value if Cyprus was forced to leave.
