By Nick Evans
Beware Greeks bearing bonds. Those who were predicting that 2010 would bring markets back to reality with a jolt after the euphoria of 2009 did not have to wait long. Only as far as the end of January, as it turned out, when Greece deposited its calamitous €8 billion bond issue on the market and the party promptly ended with a bang.
It wasn't just the fault of the Greeks and their advisers, to be fair - although the handling of the deal certainly appeared to be spectacularly poor, helping to escalate worries about the financial state of the weaker members of the eurozone into something approaching panic.
Hedge funds and other market 'speculators' may have had something to do with it, with rumours that at least one big bank was acting in concert with at least one large hedge fund to drive the sovereign CDS spread dramatically wider in the immediate aftermath of the deal.
And there have been plenty of other things to unsettle investors too. Among them: fears of overheating in China; uncertainty over the impact and shape of president Obama's new Volcker rule for banks; alarm over the scale of the sovereign financing burden in most of the 'developed' world; evidence of anaemic recovery at best in several major economies; and acute unease about the likely timing and method of measures to reverse the quantitative easing and super-low interest rate policies that have fuelled so much of the 'recovery' so far.
It was inevitable that the battle between governments and the markets over sovereign debt burdens would become a major feature of 2010 at some point - and that the eurozone would be the main theatre of conflict.
But few expected it to kick off quite so quickly. And the Greek drama has laid bare the fragility of investor and market confidence at the start of what looks like being a very tricky and treacherous year - but one in which hedge funds, if they are true to their nature and purpose, could and should thrive.
In retrospect, 2009 was an easy year for all investment managers, hedge funds included. But hindsight is a wonderful thing. And it may not always have felt that way, particularly to those of a naturally bearish or sceptical disposition.
Those who did not climb aboard the liquidity-fuelled train and ride it for all it was worth may have cause to regret their caution - however well-founded that may ultimately prove to have been. Because 2009 increasingly looks like it was a golden opportunity for managers to get out of jail after the tumultuous events of 2008, while 2010 looks like being an altogether different proposition.
Philippe Jabre, the winner of the Fund of the Year at the EuroHedge Awards for 2009 after his JabCap Multi-Strategy fund returned 85% to put memories of 2008 back in the shade, put it characteristically well in a letter to investors that he sent the following day.
After thanking them for their "unprecedented support and confidence" over the past 12 months, Jabre said that their backing during the downturn had created a stable asset base for the firm in 2009 that had enabled his team to take full advantage of the rally, first in corporate bonds and then in equities, that had fuelled the "unprecedented performance" by all his funds.
"2009 was in many ways as extraordinary as 2008, and the rapid and coordinated response by central banks to the crisis of 2008 led to a rally in equity and credit markets that took many investors by surprise," wrote Jabre.
"2010 is likely to be a quieter year as central banks initiate their withdrawal from the programmes that brought stability and confidence to the markets. As a result we are using the strong liquidity of January to reduce market risk in all of our funds and to move back to the more focused stock-picking and relative value approach that has served us well in the past."
At a more macro level, consider the views of Brevan Howard boss Alan Howard, another iconic hedge fund trader with an outstanding long-term performance record and the winner of a Long Term Performance award at the EuroHedge Awards this year.
Howard argues in his latest letter to shareholders of the listed BH Macro fund that the highly unstable macro environment (where deflation and inflation remain equally possible outcomes) and high market volatility will continue to create "an exceptionally rich opportunity set for trading".
It looks like being a tough, unpredictable, volatile year. But, if the markets were to tank and hedge funds were to protect their investors and produce absolute returns, there could be no stronger statement of what it is that hedge funds try to do - contrary to all the nonsense that is commonly believed and said - and the value of risk-adjusted returns. Hold on tight.