Eaton Vance Wins Greek Bet Five Years After Buying Credit Swaps

March 17 (Bloomberg) -- Michael Cirami, co-manager of the $2.2 billion Eaton Vance Global Macro Absolute Return Fund, waited five years for investors to realize that insurance on Greek government bonds was too cheap.

In 2005, Cirami and his co-managers bought insurance known as credit-default swaps on $50 million of Greek debt with an annual premium of $99,000 for 15 years, according to regulatory filings. Since then, Greece’s spiraling budget deficit has spurred a 14-fold increase in the price of 10-year swaps, giving the fund’s return a “meaningful” boost, Cirami said.

Betting on sovereign credit is common for macro hedge funds, private partnerships geared to big investors that seek to profit from global market trends. Now mutual funds such as Cirami’s and Mohamed El-Erian’s Pimco Global Advantage Strategy Bond are offering macro investing to retail clients. Cirami’s assets have climbed from $104 million at the end of June.

“After what has gone on in 2008 and early 2009, financial advisers are very focused on how much risk they are taking and what they get compensated for that risk,” Boston-based Cirami, 34, said in a telephone interview. Eaton Vance Global Macro markets its shares through brokers and financial advisers.

Macro hedge funds, which managed $289 billion as of Dec. 31, often rise when stocks fall because they also invest in bonds, commodities and currencies. They returned an average of 4.3 percent in 2008 as the Standard & Poor’s 500 Index fell 37 percent, according to data from Hedge Fund Research Inc.

Last year, when the S&P 500 gained almost 27 percent including dividends, macro funds rose 4.8 percent, according to the Chicago-based research firm.

Limited Flexibility

Fund research firm Morningstar Inc. doesn’t have a grouping for macro strategies or funds whose goal is to profit regardless of the direction of financial markets. It puts Cirami’s fund in its world bond category.

Few mutual funds focus exclusively on macro wagers, said Kenneth Heinz, Hedge Fund Research’s president.

“The mutual-fund rules don’t allow the same flexibility of exposure that macro funds require,” Heinz said.

Fees at hedge funds, which cater to institutions and individuals with a net worth of at least $1 million, are usually 2 percent of assets and 20 percent of profits. The Eaton Vance fund has net operating expenses of 1.26 percent a year and carries an initial sales charge of as much as 4.75 percent, according to its prospectus.

As of Oct. 31, Cirami had put 32 percent of the fund’s assets in treasury bills, mostly maturing in one year or less, issued by Egypt, Iceland, Lebanon, South Korea and Sri Lanka. Sixty percent was in mortgage securities issued by government- sponsored enterprises such as Fannie Mae and Freddie Mac.

Looking for ‘Disconnects’

The fund sets aside mortgage securities as collateral for derivatives, ranging from currency contracts on the Zambian kwacha to credit protection that it sells to others, Cirami said. Investors don’t have to own an underlying bond to buy or sell credit insurance.

The annual cost to insure Greek sovereign debt for 10 years was about 15 basis points, or 0.15 percent, on July 31, 2007, according to data compiled by Bloomberg. At that time, Eaton Vance estimated that canceling its $75 million of credit-default swaps would have produced a loss of about $390,000.

By last Oct. 30, the cost of insurance on Greek bonds had risen to 152 basis points, increasing the value of the company’s contracts, which have a longer-than-usual term of 15 years, to $5.97 million.

“We look for disconnects, and that seemed to be a glaring disconnect,” Cirami said of the low premiums that were being charged earlier in the decade to insure sovereign debt, including U.S. Treasuries. “We sort of chose where it made the most sense.”

Long-Term Ills

After Germany led a bailout plan to help Greece meet its debt payments, the price of 10-year credit-default swaps on the Hellenic Republic’s debt has fallen to 280 basis points from a peak of 380 basis points on Feb. 8, according to Bloomberg data. Cirami said the plan won’t cure Greece’s long-term ills.

“They have an immediate funding problem, and the bailout will certainly help out,” he said. “But it doesn’t solve the problem that the economy needs to restructure and become more competitive.”

Eaton Vance has run a macro portfolio for its asset allocation fund since 1997. It started the Global Macro fund in June 2007 to invest exclusively in the strategy.

El-Erian’s Fund

The fund, co-managed by Cirami, John Baur and Mark Venezia, returned 10.7 percent last year, compared with the 5.93 percent gain by the Barclays Capital U.S. Aggregate Bond Total Return Index, the benchmark that Chicago-based Morningstar uses for the fund. Eaton Vance Global Macro is designed to make money even in down markets, and uses the Bank of America Merrill Lynch 3-month U.S. Treasury Bill Index as its benchmark. The Merrill index rose 0.21 percent last year.

The Pimco Global Advantage Strategy Bond Fund was started in February 2009 by El-Erian, chief executive officer and co- chief investment officer of Newport Beach, California-based Pacific Investment Management Co. The fund, which oversees $1.59 billion, has the Barclays Capital U.S. Aggregate as its benchmark.

Eaton Vance Global Macro has been the fastest growing world bond fund in the past nine months, with Pimco Global Advantage second, said Annette Larson, a Morningstar analyst.

The Eaton Vance and Pimco funds are selling well as financial advisers and brokers pitch them as a way to hedge against market turmoil. Cirami’s fund has never lost money over a rolling 12-month period.

“There are pockets of planners and people out there who are turning more attention to macro strategies,” Eric Jacobson, director of fixed-income research at Morningstar, said in a telephone interview.

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net.