June 15, 2020 / 11:42 AM / 25 days ago

Hedge funds nurse losses on bets against Greek, Italian shares

LONDON (Reuters) - Some hedge funds that bet against a series of Greek and Italian companies are nursing losses after the European Union’s breakthrough plan for a 750 billion euro (£673 billion) recovery fund sent stock markets surging across southern Europe.

FILE PHOTO: A woman in a face mask is seen in front of the Italian Stock Exchange in Milan, as the country is hit by the coronavirus outbreak. Italy, February 25, 2020. REUTERS/Flavio Lo Scalzo

The funds, which include Citadel, Marshall Wace and AKO Capital, still hold short positions on companies such as Italy’s Banco BPM and Greece’s Piraeus Bank ahead of a June 18-19 EU summit to debate the recovery fund, aimed at helping European economies recover from the impact of the coronavirus pandemic.

Essentially a bet that the price will fall, shorting involves borrowing shares then selling them in expectation of being able to buy them back cheaper and pocket the difference.

Early last month, shorting Italian and Greek shares may have seemed like a no-brainer; heavily dependent on tourism, their economies are expected to contract 9-13% this year. Italy has also witnessed 34,000 coronavirus deaths.

But the May 18 Franco-German proposal for the recovery fund upended those bets, lifting stock markets across southern Europe. The moves accelerated after the European Central Bank upped the size of its emergency stimulus programme on June 4.

Graphic: Greek and Italian shares have rallied sharply since May 18 - here

Shares in Banco BPM have climbed 10.8% since May 18, while Monte Dei Paschi di Siena is up 25.7%.

Many stocks were off limits to hedge funds before May 18, however, when six European states, including Italy and Greece, scrapped short-selling bans introduced in March.

“Greece and Italy are the main beneficiaries of (the) EU bond and ECB quantitative easing,” said Louis Gargour, chief investment officer at hedge fund LNG Capital, who was not betting against the two countries.

“The expression ‘Don’t fight the Fed’ can also be extended to ‘Don’t fight the ECB’.”

Filings with regulators show Marshall Wace and Citadel had each taken out five short bets in Italy; aside from the banks, targets include oil and gas contractor Saipem and Italian luxury leather goods company Salvatore Ferragamo. All have so far worked against the funds.

Hedge funds had 20 outstanding shorts in Italian companies and seven short positions in Greek companies, filings show.

Those trades could still work, say, if the proposal fails to meet approval from the EU, or if markets are hit by another wave of COVID-19 infections that force economies to lock down again.

“In case of a new coronavirus crisis, economies of Italy, Spain and Greece will be the hardest hit and we will probably be targeted as new markets for shorts,” said Luca Rubini, managing director at investment firm Fidentiis in Milan.

European short-selling laws require only bets of 0.5% and above of the total number of shares to be disclosed. It is also unclear if all the hedge funds have offset those trades with long positions.

A spokeswoman for Marshall Wace said the investor was currently net long on Italian and Eurozone banks, net long Italy and had a small net long position in Greece.

London-based Oceanwood Capital Management declared a short position of 0.6% of shares in Greek lender Piraeus Bank on May 21.

Lansdowne, which has a bet of 2.8% against Piraeus Bank, last month took out bets of 0.9% against Greece’s Eurobank Ergasias, 1% of Alpha Bank and 1.7% of Public Power Corporation.

Shares in Piraeus, Eurobank Ergasias and Public Power have rallied between 30% and 40% between May 14 and June 12 while Alpha Bank rose 17.7%.

Oceanwood, Lansdowne, AKO Capital and Citadel all declined to comment.

Reporting by Maiya Keidan, additional reporting by Abhinav Ramnarayan and Stefano Rebaudo; Editing by Hugh Lawson

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