Finance: The Great Greek Gamble

In Quentin Tarantino's film Reservoir Dogs, Mr Pink gets away with the diamonds. His co-conspirators are left bloodied and dying.

When he was starting out as a hedge fund manager in the 1990s, Daniel Seth Loeb used to stalk investing chatrooms and message boards with an online persona: Mr Pink.

Mr Loeb has always evaded questions on the nom de plume, but it stuck as a nickname. And he appears to be living up to it.

This week the 51-year-old, now one of Wall Street's most successful investors, scooped up a $500 million windfall for his clients in a bond buyback deal with the Greek government.

Dozens of hedge funds have been burnt trying to play the eurozone crisis but Mr Loeb's Third Point is not one of them.

The trade in Greek government bonds, which saw a handful of canny investors double their money, has been the single most successful hedge fund bet in two years ? a period during which most hedge fund managers have struggled to navigate rocky markets, grinding out meagre returns.

Beset by nervous clients, hedge funds have thrown off the kind of high-stakes, directional betting that once made the industry famous. These days, George Soros would not be able to convince his risk manager to place the $1bn bet against sterling that saw him "break the Bank of England" on Black Wednesday in 1992.

Where managers have been willing to be audacious, they have been stung. John Paulson, the man who shorted the US housing market in 2007 and made billions doing so, has lost hundreds of millions this year shorting German bonds.

Betting on Greece has been a rare exception. Those who put their chips on Athens came out winners.

"In retrospect, it seems so obvious," says Hans Humes, the founder of Greylock Capital, one of the very first hedge funds to invest in Greek bonds. "But we were mocked at the time. I got trashed in June when I said it was exactly the time to buy Greek bonds?.?.?.?I was out there saying that Greece was a no brainer. But people are wired to be scared."

Greylock's clients have gained a 30 per cent return on their capital this year ? six times what the average hedge fund has made.

Third Point came in later, though its trade was even larger.

For those familiar with Mr Loeb's style, it came as little surprise. Like most hedge fund managers, Mr Loeb lost money in 2008 but Greece has restored his reputation, built over two decades, for big, bold bets.

Mr Loeb first sprang to prominence with acid critiques of corporate boards and executives in publicly published letters. Among his put-downs of choice: CEOs as CVDs (chief value destroyers); hereditary shareholders as members of "The Lucky Sperm Club"; and supine board members as country-club frequenting "socialites". He gained further notoriety this year by staging a coup against the chief executive of Yahoo, whom he accused of embellishing his curriculum vitae.

Although Mr Loeb has dominated headlines, Third Point was far from alone in its interest in Greece. A group of 15 other hedge fund analysts visited Athens on September 20 ? part of a whirlwind two-day roadshow organised by the London brokerage Exotix.

They did not receive the most auspicious welcome: a 24-hour strike had paralysed public transport and cars choked the streets of Athens. In Syntagma Square, metro workers were protesting at spending cuts, holding aloft a scaffold with an effigy swinging from a noose.

On their agenda: meetings with some of Greece's biggest corporations, the debt management agency and leading people in the government, including two of the cabinet's most powerful figures: Kostis Hatzidakis, the minister of development, and Christos Staikouras, the deputy finance minister.

After those meetings, many of the analysts returned to the trading floors of London and New York with a contrarian conclusion: Greece ? a virtual pariah state, victim of a huge and continuing drain of international capital ? was a major investment opportunity.

Truth be told, in the late summer, Athens' ministries and banks were frantic with the comings and goings of hedge fund managers.

The rightwing coalition government's policy has been to give high-level access to investors of all kinds, including hedge funds, for the first time ? a marked change from the previous government, where many traders were demonised as evil speculators.

Third Point had been among the earliest funds to visit Athens, beginning its hunt for Greek bonds in July and August.

The firm had been carefully eyeing Greece for some time but analysts were intrigued by how low the bonds were trading after their restructuring in March.

Amid concerns of a Greek exit from the eurozone, prices for the new "strip" of bonds ? a basket of securities with mixed maturities investors had received in exchange for their old bonds in the restructuring ? had continued to sink.

It seemed absurd. "I have never seen a sovereign debt restructuring situation where the new debt trades lower than the old debt," says Julian Adams, CEO of emerging market hedge fund Adelante Asset Management, which also made big profits from the bonds. "It will go down in restructuring history as being an absolutely extreme occurrence."

Source: http://www.cnbc.com/id/100337190

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