Greek ‘No’ Meets Month of Hedge Fund Caution as Shorts Jump

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Supporters Of The
Supporters of the 'No" vote wave Greek national flags outside the parliament building in Athens on July 5. Photographer: Yorgos Karahalis/Bloomberg

Hedge funds riding equities toward their best year since the financial crisis turned cautious in the runup to Greece’s “no” vote Sunday.

Rising short sales sent a gauge of manager bullishness compiled by Evercore ISI down 1.3 percentage points over the past month, putting the measure of short and long exposure close to neutral. In futures tracking the Standard & Poor’s 500 Index, bearish positions outnumber bullish ones by the most in three years.

While buying stocks and reducing shorts in the U.S. made sense after a six-year bull market added $17 trillion to share values, trying to game the outcome in Greece has been another matter. Greeks voted against accepting further austerity in exchange for a new European bailout, increasing the chances of the country having to abandon the euro.

“Good hedge funds know where their edge is and most of them probably feel like they don’t have an edge in calling this,” Uri Landesman, who helps oversee $1.4 billion as the president of New York-based Platinum Partners LLP, said in a phone interview. “People are just saying these major issues that are facing the market today are out of our control so we’re not going to bet.”

Vote Results

Sixty-one percent of voters backed Prime Minister Alexis Tsipras’s rejection of further spending cuts and tax increases in an unprecedented referendum that’s also taken the country to the brink of financial collapse.

The S&P 500 fell 0.4 percent at 4 p.m. in New York.

Hedge funds were up 2.6 percent in 2015 before today, beating the Standard & Poor’s 500 Index’s 0.9 percent gain and leaving managers up on the gauge for the first time since 2008.

For five years the hedge fund industry has been unsure whether to part with shorts after the experience of the financial crisis. Now, with volatility exploding in stocks from China to Europe and the U.S., managers have taken a step back.

The Evercore ISI index of hedge fund long versus short bets was at 50.5 in the week ending July 1, down from 51.8 at the start of June, data from the New York-based research firm show.

The survey, based on 31 hedge funds with about $86 billion under management, tracks investments on a zero through 100 scale. Readings of zero show “maximum” short selling, or the sale of borrowed equities with the hope of profiting by buying them at lower prices later; 100 means “maximum” bullish bets.

The index has dipped below 50 only twice in the past year.

Normal Exposure

“They’re going from modestly bullish to basically right around normal level of net exposure,” said Oscar Sloterbeck, head of company surveys at Evercore ISI in New York. “Certainly the Greece concerns are affecting hedge fund sentiment around the market near term.”

Large speculators held about 22,810 more short positions in S&P 500 futures than long ones through June 30, according to data compiled by Bloomberg and the U.S. Commodity Futures Trading Commission. That’s the highest amount of bearish bets relative to bullish ones since July 2012.

Global stocks tumbled last Monday after the Greek bailout broke down, with the S&P 500 sinking 2.1 percent. The S&P 500 snapped its longest quarterly gain since 1998 while the Stoxx Europe 50 index posted its biggest monthly drop in two years as Greece and its creditors wrestled over terms of the nation’s bailout. In China, the Shanghai Composite Index plunged 24 percent in three weeks.

Unknown Territory

Tsipras and his Syriza party had urged Greeks to vote “no,” arguing the country could remain in the single currency on better terms if they do so -- a contention rejected by creditors.

Greece now enters unknown economic and financial territory, with no clear path to continued European aid. Credit Suisse Group AG estimated that the probability of Greece leaving the euro would be 75 percent with a “no” vote, according to a note on Friday.

“It’s pushing the overall level of uncertainty to a different area,” said Albert Brenner, director of asset allocation strategy who helps oversee $5.5 billion at People’s United Bank Wealth Management in Bridgeport, Connecticut. Before the referendum, “it was like, are we going to get an agreement or not?” he said. “And now, we’re at a point where we’re not even sure what process we’d need to get to, to get out of the mess.”

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