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
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
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
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.