Hedge Funds Await Euro Bank Crisis Opportunities
This article went to press prior to the European Union's October 27, 2011, announcement of a plan to manage Europe's debt crisis.
The debt crisis in Europe presents a plethora of trading opportunities for hedge funds —distressed assets, short positions, bankruptcy debt or fixed income — but the landscape is not for the fainthearted.
Funds must weigh the risks of a possible double-dip recession on both sides of the Atlantic and of the emerging reality that even the most historically solid economies of France and Germany are not immune to the ripples from the more vulnerable Greece, Spain, Portugal, Ireland and Italy,
To add fuel to the fire, action in mid-August by the European Securities and Markets Authority to temporarily ban short sales on financial stocks in France, Belgium, Italy and Spain has hedge funds further concerned that sporadic regulation may affect their investments in the region.
According to Paul Rowady, a Senior Analyst at research firm TABB Group, some hedge funds that are highly leveraged are being distracted from exploring money-making opportunities and are instead engaged in damage control. "But for those funds able to focus on making money, there are a number of ways to achieve it in this environment,” he says.
To choose the right set of investments, some guidelines should be kept in mind, according to Duncan Sankey, Senior Portfolio Director and Head of Research at London-based Cheyne Capital. "It is a matter of looking for [corporations] that have the ability to fund themselves through a sovereign default until financing conditions are improved. Such companies should have adequate access to alternative liquidity, such as cash, existing bank lines of credit, or readily salable assets,” he says.
Additionally, companies with nondomestic revenue streams (particularly from high-growth emerging markets) may be better investments in today's market because the more nondomestic revenue sources a company has, the less vulnerable it will be to the economic fallout of austerity measures in its domestic economy.
"In the unlikely event that its home country leaves the euro, [the company] will still have euro liabilities, while domestic revenues will re-denominate into a much depreciated domestic currency. So having nondomestic revenues from which to service the euro liabilities is, therefore, key,” says Sankey.
Financials firing lineThe uncertainty ar