| LONDON, July 16
LONDON, July 16 With politicians struggling to
shore up plans to tackle Europe's debt crisis, hedge fund
managers are finding it hard to come up with moneymaking ideas
to suit markets focused on the latest announcement by euro zone
or U.S. leaders.
Once seen as able to make money in all conditions, many
hedge funds have opted to keep their bets small and their
exposure to movements low as quieter summer trading looms,
mindful of last August's stock market meltdown.
"Not only are we going through a period that, seasonally, is
not good to take risk, but the looming U.S. elections, U.S.
fiscal cliff and U.S. debt ceiling renegotiations are keeping us
on the defensive," said Pedro de Noronha, managing partner at
Noster Capital, whose Global Value fund rose 14.3 percent last
"The risk is that we may underperform a rising, illiquid
summer market. But the reward for taking a lot of risk in the
months ahead is just not there. We prefer focusing on capital
preservation and running a tight ship until we can foresee
Summer's quieter markets can be a dangerous time for
investors. In the four moths to end-September last year hedge
funds lost 7.9 percent on average, while equity long-short funds
-- which bet on rising and falling stock prices -- lost 12.1
percent, according to Hedge Fund Research.
"I would definitely say people are still cautious," said one
fund of hedge funds manager who spoke on condition of anonymity.
"It is a difficult time to do that (increase bets). I do not
think anything (in the euro zone bank recapitalisation deal) is
really conclusive yet."
Few funds have been convinced either by last month's
agreement among euro zone leaders to allow the European
Stability Mechanism (ESM) to recapitalise banks directly or by
the European Central Bank cutting interest rates last week.
"What they (euro zone leaders) agreed two weeks ago needs to
be formalised," said Philippe Gougenheim, chief executive and
chief investment officer at Gougenheim Investments, who has
recently cut his stance on equities to flat, from net long.
"In terms of capitalising banks directly, the ESM now has
more to do but it has still got a similar amount of money. I do
not think much has been solved."
An index of leading euro zone stocks jumped 5
percent in the session after news of last month's deal -- which
saw euro zone leaders agree to bend EU aid rules to shore up
banks and bring down the borrowing costs of stricken members
such as Italy and Spain -- and is still up 4.2 percent.
However, many hedge fund managers look unlikely to take big
bets until detail of the deal -- often a key sticking point in
the euro zone's ongoing debt conundrum -- has been thrashed out.
On Monday, Germany's Constitutional Court said it would not
rule for nearly two more months whether Germany can legally
ratify the EU's permanent bailout scheme and the fiscal pact for
"There has not been a wholesale shift to become more
bullish. The details (of the banks recapitalisation plan) still
have not come through yet and there are still strong indicators
of risk out there," said Tim Beck, senior analyst at fund of
funds firm Stenham Advisors.
"People will have traded around it and may have taken
profits on some of the shorts. But it does not seem to have been
a trigger to change overall positioning in funds."
Not everyone was pessimistic.
"We believe there are legs in this rally," said Louis
Gargour, chief investment officer at London-based hedge fund
manager LNG Capital. "What has happened is not a sea-change, but
... corporates are in reasonably good shape. The problem is not
corporate, it is sovereigns."