Hedge Funds Try 'Career Trade' Against Euro

By SUSAN PULLIAM, KATE KELLYand CARRICK MOLLENKAMP

Some heavyweight hedge funds have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis. The big bets are emerging amid gatherings such as an exclusive "idea dinner" earlier this month that included hedge-fund titans SAC Capital Advisors ! and Soros "und #anagement C. $uring the dinner% hosted by a bouti&ue investment ban' at a private townhouse in #anhattan% a small group of all-star hedge-fund managers argued that the euro is li'ely to fall to "parity"(or e&ual on an exchange basis(with the dollar% people close to the situation say.
George Soros, head of the $27-billion asset fund manager, warned publicly last weekend that if the European Union doesn t fi! its finances, "the euro may fall apart#"

The currency wagers signal that big financial players spot a rare trading opening driven by broader mar'et gyrations. The euro% which traded at )*.+* in $ecember% now trades around )*.,+. -ith traders using leverage(often borrowing ./ times the si0e of their bet% accentuating gains and losses(a euro move to )* could represent a career trade. 1f investors put up )+ million to ma'e a )*// million trade% a +2 price move in the right direction doubles their initial investment. "This is an opportunity...to ma'e a lot of money%" says 3ans 3ufschmid% a former senior Salomon 4rothers executive who now runs 5lobe6p "inancial Services SA% a hedge-fund administrator in ondon and 7ew 8or'. 1t is impossible to calculate the precise effect of the elite traders9 bearish bets% but they have added to the selling pressure on the currency(and thus to the pressure on the :uropean Union to stem the 5ree' debt crisis. There is nothing improper about hedge funds ;umping on the same trade unless it is deemed by regulators to be collusion. <egulators haven9t suggested that any trading has been improper. Through small gatherings% hedge funds can discuss similar trades that can feed on each other% in moves similar to those critici0ed by some investors and ban'ers in .//=. Then% big hedge-fund managers% such as 5reenlight Capital 1nc. !resident $avid :inhorn% who also was at this month9s euro-dominated dinner% determined that the fortunes of ehman 4rothers 3oldings and other firms were dim and bet heavily against their securities% accelerating their decline.

An SAC manager% Aaron Cowen% who pitched the group on the bearish bet% said he viewed all possible outcomes relating to the 5ree' debt crisis as negative for the euro% people familiar with the matter say. SAC9s trading position on the euro is unclear. 5eorge Soros% head of the ).>-billion asset fund manager% warned publicly last wee'end that if the :uropean Union doesn9t fix its finances% "the euro may fall apart." Through a spo'esman for Soros "und #anagement% he declined to comment for this article. A 5ree' finance ministry official declined comment. A :uropean Commission spo'eswoman said the Commission doesn9t comment on mar'et rumors% adding that the :U9s executive arm is wor'ing toward developing rules to tighten regulation and ris'. "ew traders expect the value of the euro to totally collapse% the way the 4ritish pound did in *??. amid a large bearish bet by #r. Soros. 1n that famous trade(which traders say led to a )* billion profit(selling led by #r. Soros pushed the pound9s value so low that 4ritain was forced to withdraw its currency from the :uropean :xchange <ate #echanism% causing the pound to drop even more sharply. The euro is an extremely deep mar'et% with at least )*.. trillion in daily trading volume% dwarfing the 4ritish pound9s daily trading volume in *??.. Again% derivatives% 'nown as credit default swaps% are playing a part in the current trading. Some of the largest hedge funds% including !aulson @ Co.% which manages ),. billion% have bought such swaps% traders say% which act as insurance against a default by 5reece on its sovereign debt. Traders view higher swaps prices as warning signs of potential default. Since $ecember% the prices of such swaps have more than doubled% reflecting investors concerns about a default by 5reece. !aulson had built a large bearish position on :urope% people familiar with the matter say% including swaps that will pay out if 5reece defaults on its debt within five years. !aulson since has closed out that position and has ta'en the other side of the bet% leaving the firm with a bullish stance now% a person familiar with the matter says. 1n a statement% !aulson declined to comment "on individual positions%" saying it "does not manipulate or see' to destabili0e securities in any mar'ets." ate last year% hedge funds bought swaps insuring the debt of !ortugal% 1taly% 5reece and Spain% and began ma'ing bearish euro bets. #ore recently% the hedge funds have sold these swaps to ban's loo'ing to "hedge%" or protect% their holdings of :uropean government bonds% traders say. 1n the past year% the overall value of swaps insuring against a 5ree' debt default has doubled% to )=A.= billion% according to $epository Trust @ Clearing Corp. 4ut the net amount that sellers would actually pay in a default rose ;ust modestly over the same period% up only A2 to )=.? billion% the $TCC says. This suggests that ban's and others have bought and sold roughly e&ual amounts of swaps to hedge their positions% traders say.

The bigger bet against :urope these days is playing out in the vast foreign exchange mar'ets% which offers a plethora of ways to trade. The focus on the euro began on $ec. A% when the currency swooned *.+2 following a ;obs report in the U.S. that buoyed the dollar. 4etween $ec. ? and **% some big :uropean and U.S. ban's made bearish calls on the euro by buying one-year euro "puts." !uts give the holder the right to sell an investment at a specified price by a set date. The pressure on the euro soon began building. The currency fell another *.,2 on $ec. *B when Standard @ !oor9s downgraded 5ree' sovereign debt. At that point% some large investors including asset manager 4lac'<oc' 1nc. 4 C -/.*/2 had bearish bets on the euro% believing that it couldn9t sustain the levels at which it was then trading and that :urope9s financial recovery would lag that of the U.S.% according to people familiar with their position. The concerns about 5reece heightened on Dan. ./% when investors began to worry that the country would be unable to refinance its heavy debt load% causing the euro to fall another *.,2. 6n Dan. .. 5reece said it planned a five-year = billion euro bond sale in the coming days. To stave off speculators% 5reece and its investment-ban' advisors limited what could be allocated to hedge funds% said a person familiar with the sale. 4y Dan. .=% the value of the new bond had fallen ,.+2% which left investors unhappy. 6n Dan. .= and .?% analysts from 5oldman Sachs 5roup 1nc. 5S -*./.2 too' a group of investors on a field trip to meet with ban's in 5reece. The group included representatives from about a do0en different money managers% say attendees% including Chicago hedge-fund giant Citadel 1nvestment 5roup% the 7ew 8or' hedge fund :ton !ar' Capital #anagement% and !aulson% which sent two employees% say people who were there. :ton !ar' declined to comment. $uring meetings with the 5ree' deputy finance minister and executives from the 7ational 4an' of 5reece% among other ban's% some investors raised tough &uestions about the state of the country9s economy% according to these people. At the "eb. = "idea dinner" hosted by #onness% Crespi% 3ardt @ Co.% a bouti&ue research and bro'erage firm% three portfolio managers spo'e about investment themes related to the :uropean debt crisis. $uring the dinner(featuring lemon-roasted chic'en and filet mignon at a private townhouse in #anhattan(a Soros manager predicted that interest rates are going up% people close to the situation say.

$onald #organ% head of hedge-fund 4rigade Capital% told the group he believed 5ree' debt is an early domino to fall in a contagion that eventually will hit U.S. companies% municipalities and Treasury securities. #r. :inhorn% meanwhile% who was among the earliest and most vocal bears on ehman% said he is bullish on gold because of inflation concerns. #r. :inhorn declined to comment. 4y the wee' of the dinner% the si0e of the bearish bet against the euro had risen to record levels of B/%/// futures contracts(the most recently available data and the highest level since *???% according to #organ Stanley. The data represents the volume of futures contracts that will pay off if the euro sin's to specific levels in the future. Three days after the dinner% another wave of selling hit the euro% pushing the currency below )*.,B. E These hedge funds are the financial hit-men of our economy. 3owever% they expose themselves and everyone else to incredible ris's. These are not good ris's. F $%le!ander Smith 1n a separate move last wee'% traders from 5oldman% 4an' of America Corp D!# -*.*B2 .9s #errill ynch unit% and 4arclays 4an' ! C 4CS G/.AA2 were helping investors place a particularly bearish bet on the euro% traders say. The trade involved an inexpensive put option that will provide its holder a big payoff if the euro falls to the level of a single U.S. dollar within a year. Cnown as a "tail-ris'" trade because its probability is low% the euro-dollar parity put is a cheap way of ensuring that if the euro sin's dramatically within a year% an investor will generate big returns. A going price for the bet is around >2 of the amount that a parity-trade would pay off. So% for an investor see'ing a )* million bet% the cost is )>/%///. This means that the mar'et currently assigns roughly *A-to-* odds that parity will be reached. 1n 7ovember% the odds were around ,,to-*% said a person who has seen the trade9s pricing. $&om 'cGinty and (enny Strasburg contributed to this article# Write to Susan !ulliam at susan.pulliamHws;.com% Cate Celly at 'ate.'ellyHws;.com and Carric' #ollen'amp at carric'.mollen'ampHws;.com