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Hedge Funds Nurse Losses on Bets

Some hedge funds that bet against a series of Greek and Italian companies are nursing losses. This came after the European Union’s breakthrough plan for a 750 billion euro recovery fund sent stock markets surging.

The funds include Citadel, Marshall Wace, and AKO Capital. It still holds short positions in companies such as Italy’s Banco BPM and Greece’s Piraeus Bank. Ahead of a June 18-19 EU summit, it was to debate the recovery fund, aimed at helping European economies recover.

Essentially shorting, which is betting that the price will fall, involves borrowing shares. Then, selling them in expectation of being able to buy them back cheaper and pocketing the difference.

In May 2020, shorting Italian and Greek shares may have seemed like a no-brainer.  Heavily dependent on tourism, people expect their economies to contract 9-13% this year. Italy witnessed 34,000 deaths from the coronavirus.

But the May 18 Franco-German proposal for the recovery fund upended those bets. It was lifting stock markets across southern Europe and the moves accelerated. This was after the ECB  upped the size of its emergency stimulus programme on June 4.

Off Limits to Hedge Funds 

Banco BPM shares have reached 10.8% since May 18, while Monte Dei Paschi di Siena climbed 25.7%.

Many stocks were off-limits to hedge funds before May 18. Six European states, which include 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. This was according to Louis Gargour, the Chief Investment Officer at LNG Capital. Gargour was not betting against the two countries.

‘Don’t fight the ECB’

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

Files with the 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 of these have so far worked against the funds.

Filings show hedge funds had 20 outstanding shorts in Italian companies and seven short positions in Greek companies.

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 lockdown again.

In the case of a new coronavirus crisis, economies of Italy, Spain, and Greece will be hit the hardest. And they will probably be targeted as new markets for shorts. This was according to Luca Rubini, managing director at investment firm Fidentiis in Milan.

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

The investor was currently net long on Italian and Eurozone banks. It was net long Italy and had a small net long position in Greece. This was a statement from a spokeswoman for Marshall Wace.

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

Lansdowne has a bet of 2.8% against Piraeus Bank. Last month it took out bets of 0.9% against Greece’s Eurobank Ergasias. Moreover, it took out bets of 1% of the 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. Moreover, Alpha Bank rose 17.7%.

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