* Funds move on from CDS to relative value trades
* Gargour bets on Spanish corporates versus the sovereign,
* Man Group computer points to CDS being overpriced
* Some move onto France amid election uncertainty
By Laurence Fletcher
LONDON, April 26 Hedge funds have spotted
money-making opportunities in Spain, betting that market fears
over the southern European country's deepening debt crisis have
made some assets too cheap relative to other securities.
Managers have been exploiting what they see as the
mispricing of credit default swaps (CDS), government and
corporate bonds and stocks, after months of growing market
concern that Spain might need an international bailout, using
relative value trades - betting on one security versus another.
"There's probably more juice for relative value trades than
directional plays," said one fund of funds manager who spoke on
condition of anonymity.
"It's a pretty well-flagged story. I don't know how much
juice they think is in it," the fund manager said of Spanish CDS
The moves echo the earlier stages of the euro zone crisis,
when hedge funds - renowned as being among the nimblest of
investors - bought CDS - designed to pay out in the event of
default - on Greece and other weaker euro zone countries.
When the trade became more popular they quickly took profits
and moved onto countries such as France and Belgium.
Spain's stocks have tumbled 17.1 percent this year
while the 10-year government bond yield has risen
from less than 4.7 percent at the start of February to more than
6 percent earlier this week as investors fretted over its
debt-laden banks and consumers and its shrinking economy.
A number of hedge funds bought Spanish CDS at the start of
the month, say industry insiders, helping drive up the price to
more than 500 basis points earlier this week from below 350
basis points in February.
While funds have kept positions relatively small on concerns
over lower liquidity in some credit markets and a fast-changing
political environment, managers are generally still short stocks
- betting on falling prices - looking at sectors such as banks.
"We're seeing a little bit of dabbling... Funds are taking a
small part of their portfolios, a few percent," said one prime
broker, who spoke on condition of anonymity.
"European equity managers see a lot of fundamental drivers.
They're putting on bets to benefit... Spanish banks can be quite
volatile. My perception is that a problem with the sovereign
automatically has a bad effect on banks."
Louis Gargour, chief investment officer at London-based
hedge fund manager LNG Capital, has bought bonds in Spanish
companies earning the bulk of their revenues overseas as he
thinks they have been harshly sold off in recent months.
"The real opportunity is in Spanish companies that have
strong business models, global footprints and are in sound
financial shape regardless of Spain. An example of this is
Telefonica, which only produces 33 percent of its
revenues in Europe and 67 percent from Latin America.
"It's an attractive telecom with an emerging market
footprint, increasing revenues (and) strong margins but it's
price and yield have been affected by the widening in Spain and
it's pulled Telefonica with it."
He has paired this position with a short bet on Spanish
"We expect the sovereign spread could go wider whereas the
corporate fundamentals of strong well run companies will be
realised by the market," he said.
He has also put on relative value bets between different
maturities of Spanish government bonds. For instance, he has
bought one-year bonds, which currently yield 2.54 percent, and
has shorted five-year bonds, which yield 4.66 percent - a trade
that has moved in his favour in recent days as one-year yields
have dropped sharply.
"I think the Spanish yield curve is too flat... I think
Spain will be around in a year," he said. "Sovereigns will have
cash for the shorter maturity bonds. It's only in the
longer-term that it (the debt problem) is really reflected."
Most hedge funds are still bearish on the euro zone's debt
crisis, which was evidenced on Thursday in a string of quarterly
reports from some of Europe's top banks.
BH Macro, a feeder fund into the Brevan Howard's
Master fund, one of the world's biggest and most successful
hedge funds, said last week that: "Looking forward, the outlook
for the peripheral economies remains bleak, due to both the
fiscal drag and low availability of credit, with rising energy
prices acting as an additional burden."
Some funds who have long-term bets on Spanish banks
recovering and who are unwilling to sell at current prices have
gone short a basket of Spanish stocks as a hedge, specially
weighted to counter further sharp falls in bank stocks.
"If banks are a long-term position for you you've maybe put
on a market hedge, but because banks have higher beta you've
overhedged," the prime broker said.
However, not everyone is so cautious. Man Group's
"spike detection" computer programme, which looks for unusual
price movements to try and predict crises and which snapped up
protection before last summer's debt crisis, has not bought
heavily into protection in recent weeks.
"Recently the market has been extremely twitchy. But what do
we know about Spain that we didn't know three weeks ago? It's
getting warmer, so the desire to protest (on the streets of
peripheral European countries) has grown," said Sandy Rattray,
CIO of the Systematic Strategies unit.
"The cost of insurance has risen more rapidly than our model
suggests it should have done. We haven't been significant buyers
Meanwhile, some managers have already moved beyond Spain.
Philippe Gougenheim, who is set to launch a global macro fund
later this year, prefers CDS on France, which is midway through
its presidential election, or Portugal.
"We all agree that Spain is facing many difficulties, but so
are other neighbouring countries. I find it more interesting to
buy France or Portugal CDS at current levels," he said.
"France is interesting, as, if Mr (Francois) Hollande is
elected President, he will certainly request an audit of public
accounts, which will certainly not look nice."