LONDON Hedge funds are so far shying away from the political turmoil in North Africa, despite their reputation as risk-takers on the lookout for a quick gain.
Only a handful are starting to hunt ways to profit with investments, for example, in oil and credit protection.
"It's a little like the financial crisis in 2008. Many managers are saying, 'how am I supposed to figure this one out?'", said Morten Spenner, who heads hedge fund of fund manager International Asset Management.
"If (Libya's) Gaddafi said tomorrow, 'Look, we've sorted it all out', oil prices could fall as much as 5 or 6 dollars a barrel in a day. And you could be really badly hurt."
A sudden burst of anti-government protest in Tunisia last month has sparked violent uprisings in Egypt and oil-rich Libya, paralysing economies and threatening asset values across the North African region and beyond.
Macro hedge funds normally like to take bets on which country or company might suffer most or bounce back fastest from a debt crisis or a recession, but are wary of trying to second-guess governments or politically charged situations.
Most are now playing a waiting game until they have a better feel for how political tension could harm financial markets or the credit ratings of countries and companies across the region.
After losing 19 percent in 2008's market turmoil, according to Hedge Fund Research, and suffering again last summer, many hedge funds fear being caught out again by sharp volatility.
"Everyone's just being super-cautious," said one prime broker who asked not to be named.
Oil surged to its highest level since August 2008 on Thursday, as skirmishes between Gaddafi's supporters and demonstrators seeking an end to his 41-year authoritarian rule could encourage leadership challenges in other oil producing countries like Saudi Arabia
But the potential threat to oil supply -- and the political response to the crisis -- remains unclear.
"None of the major players reported to be operating in Libya has seen increased short selling -- yet," Alex Brog, an analyst at Data Explorers, one of world's largest providers of data on long and short interest in listed companies.
Libya is Africa's third-largest oil producer and has the continent's largest proven reserves, estimated at 2 percent of world supply, but short interest in several firms exposed to Libya such as Eni (ENI.MI), Repsol (REP.MC), Statoil Asa (STL.OL) and Total SA (TOTF.PA) remain low, Data Explorers said.
However, Pedro de Noronha, managing partner at Noster Capital, said he has raised exposure to oil and oil-related companies to 14 percent from 9 percent as Libya's crisis erupted, believing OPEC's spare capacity is well below the estimated 5 million barrels per day.
"You could see oil prices at $150 or $200 quite easily if Libya continues," he told Reuters.
De Noronha, who was already cautious on global markets prior to the Middle East crisis, has also continued to raise his holding in emerging markets credit default swaps -- derivatives that pay out in the event of default.
"We still believe emerging markets is a place where one wants to be contrarian," he said. "When one emerging market has an issue, they all blow up."
Joe Shaw, portfolio manager at SYZ Asset Management, said one oil-focused hedge fund was up 20 percent this month.
"In the commodity space they were bullish, and they've been riding it out or adding, with trailing stops (stop losses)."
More risk-averse funds may seek to profit from the chaos by taking out straightforward options contracts on the medium or long-term price of oil pending greater conviction on how the crisis will unfold, Spenner said.
"That is the one thing that perhaps managers can do. It might be cheaper now to buy an option where you propose oil might trade at $85 in a year's time ... if you think that things will eventually calm down. It all depends on your world view."
(Editing by Erica Billingham)