Lonely Hedge Fund Bullish on Greece Tries to Woo Investors
As the founder of a hedge fund that plans to buy nothing but Greek stocks, George Elliott is used to being treated as a curiosity.
In March, Elliott met with the investment chief of a family office in London who said within seconds of sitting down that the firm had no interest in giving money to a hedge fund wagering on Greece. The executive merely wanted to hear his story, Elliott, the founder of Naftilia Asset Management Ltd., said in a telephone interview from his office in Athens.
Elliott, 39, responded by asking a few questions of his own, including whether the executive had invested in Russia after its 1998 currency crisis, in Argentina 10 years ago after the nation defaulted on its debt or in the Standard & Poor’s 500 Index (SPX) in March 2009, when the benchmark plunged to its lowest point in 13 years. Finally, Elliott questioned whether the family office’s investment chief had ever bought shares of Apple Inc. In all cases, the answer was no.
“Then you are not qualified to be discussing Greece with me because you have missed the best investment opportunities over the past 20 years,” Elliott retorted.
After a lengthy discussion, the family office decided to send a team to Athens to research Elliott’s investment thesis. The firm eventually agreed to invest in Naftilia’s Greek Opportunity Fund, said Elliott, declining to identify the family office or its executives because his clients are private.
“It takes time to convince, but when you show them the numbers and you really do not focus on the macro but the micro of individual companies, then people start to get excited,” said Elliott, who’s been raising money for the Greek fund since October. “At the same time, we are extremely lonely. We are one of the few people out there feeling optimistic.”
While Elliott declined to comment on how much money he has raised for the Greek fund, a person with direct knowledge of the matter said the total exceeds 50 million euros ($63 million). Elliott also won’t discuss what stocks and industries he’s researching other than saying he plans to avoid Greek banks. The total amount Elliott would consider investing won’t exceed 250 million euros because the sell-off in Greek equities has put a limit on how much money can be deployed. About 75 percent of Greek companies have a market value of less than 50 million euros, he said.
Most investors are dubious that anything tied to Greece deserves comparison with the more than 600 percent gain for Argentina’s Merval index since the end of 2001 or the growth of Apple (AAPL), now the world’s most valuable company. The European country is saddled with a fifth year of recession, an unemployment rate of 21.9 percent, banks that have lost deposits and concerns about a possible exit from the 17-nation euro bloc.
Following the June 17 parliamentary elections in Greece, new Prime Minister Antonis Samaras of the New Democracy party has pledged to seek relief from austerity measures that have hurt the economy while keeping European bailout funds flowing. Harvinder Sian, a senior rates strategist at Royal Bank of Scotland Group Plc in London, said there’s still a 90 percent chance Greece will drop the euro within two years because of the difficulty of cutting spending and civil-service jobs.
The Athens Stock Exchange (ASE) has plunged 88 percent since the end of 2007 and the yield on 10-year Greek government bonds is 26 percent, compared with 1.6 percent for similar German bonds, indicating that investors perceive the country at high risk of default even though it restructured its debt in March.
MSCI Inc., whose stock indexes are tracked by investors with about $7 trillion of assets, said yesterday that it will review whether to reclassify Greece’s stock market as an emerging market. Doing so would make Greece the first advanced country to be cut to developing status.
“There’s a huge uncertainty about the clarity and the sustainability of earnings” for Greek companies, said James Butterfill, who helps oversee about 40 billion pounds ($63 billion) as a global equity strategist at Coutts & Co. in London. “If you have a very high risk profile, then maybe you can pick out opportunities. For the majority of our clients, you would be adding a huge amount of volatility to the portfolio and that’s hard to stomach.”
The biggest danger is picking the right time to purchase stocks because of the risk that Greece can’t fulfill the financial demands required to stay in the euro, Butterfill said. Investors who move too early may find themselves holding shares they bought in euros now trading in a weaker drachma, instantly eroding much of the value, he said.
Naftilia manages about $400 million and has other hedge funds focused on trading the stocks of global shipping and nuclear energy companies. The name of the firm, which is registered with the U.S. Securities and Exchange Commission, derives from the Greek word for shipping.
Elliott’s main shipping fund, started in 2004, rose 29 percent in its first year and gained in the three following years before dropping 26 percent in 2008 and 20 percent last year, according to a person briefed on the company’s performance. Hedge funds rose 9 percent on average in 2004, fell 19 in 2008 and lost 5.3 percent in 2011, according to Chicago- based Hedge Fund Research Inc.
Elliott had been based in Dubai until deciding to open an office in his native Athens in October 2010, four months after Greece received a 110 billion-euro rescue from the European Union and the International Monetary Fund to meet its bond payments. Greece received a second bailout this year of 130 billion euros.
He did so based on a view that Greece’s debt crisis offered huge profits for investors who were willing to take the risk and that Naftilia needed an on-the-ground presence to research local companies. Elliott has spent the past 18 months examining corporate balance sheets, building a network of contacts in government and the business community, hiring analysts from banks and meeting with investors. In total, he and seven colleagues are working on the Greek Opportunity Fund.
They are focusing on companies punished by the stigma of being in Greece that generate most of their business outside the country, and firms whose share prices may make them attractive takeover targets.
“The whole premise behind the idea is that Greece has technically defaulted within a strong currency,” said Elliott, who studied money management at City University in London before starting his finance career in 1997 as an investment banker at Societe Generale SA. He also worked as a stock analyst at Marfin Investment Group SA and as an investment manager for Prometheus Gas SA, a Greek unit of Russia’s OAO Gazprom.
“When Argentina defaulted, they had incredible returns on the stock market but incredible volatility on the currency as well so it was pretty hard to start making allocations,” he said. “If Greece remains in the euro, we think this is going to be an incredible investment opportunity from a risk-return perspective.”
Conversely, the return of the drachma, which Elliott predicts won’t happen, means investors could buy stocks more cheaply.
Greece’s six-week political drama temporarily delayed Naftilia’s plans. The Syriza party, which favors reneging on the fiscal-tightening terms tied to Greece’s bailout, won enough votes on May 6 elections to block the formation of a government.
Elliott held off buying Greek equities, determining that the risk of doing so was too high without a government in place. He has been sitting on the money he’s raised for the Greek fund and not charging the fee that hedge funds typically bill to investors to manage assets.
Naftilia isn’t completely alone among hedge funds seeing opportunity in Greece. Lansdowne Partners LP, the biggest European hedge fund that invests in stocks with about $11.6 billion under management, bought shares of Greek port companies Piraeus Port (PPA) Authority SA and Thessaloniki Port (OLTH) Authority SA during the first four months of the year, according to a presentation obtained by Bloomberg News.
Piraeus Port, with a market value of 225 million euros, sunk 25 percent as of yesterday since hitting a high this year of 12.05 euros a share on Feb. 13. Thessaloniki Port, with a market capitalization of 110.6 million euros, fell 15 percent since also reaching a high on Feb. 13 of 12.98 euros a share. Executives at London-based Lansdowne declined to comment on their investments.
Some hedge funds have bought Greek sovereign debt because they’ve been attracted by high yields, not necessarily a bullish view on growth for the country or its companies. Finisterre Capital LLP, a London-based hedge fund, has invested in Greek government and corporate debt this year, said a person with direct knowledge of the matter, who asked not to be identified because the firm is private. Executives at the firm declined to comment.
Greylock Capital Management LLC purchased government bonds after Greece’s investors agreed to forgive 100 billion euros of debt in March, said Hans Humes, president of the New York-based hedge fund. At prices before the June 17 elections, investors could triple their money and had a downside risk of losing just 40 percent, he said. Still, it’s hard to convince hedge fund clients to invest in situations such as Greece because they fear being second-guessed, Humes said.
“If they put money in Greece and lose money, then their bosses will say they shouldn’t have done it,” Humes said. “The reality is, that your chances of making money in a bombed out market are far higher than if you chase a market that has done very well.”
Some potential Elliott investors had been holding off until after the elections, said Stavros Siokos, a London-based president at Sciens Capital Management LLC, which provides managed accounts for those who in put money in the Naftilia Greek Opportunity Fund.
While Greece leaving the euro would be a disaster for the country and its people, an exit might benefit companies that do a lot of business overseas, he said. These companies will generate revenue in stronger currencies such as the euro and U.S. dollar, and have borrowing and labor costs in a devalued drachma, said Siokos, who was previously a Citigroup Inc. managing director in London and head of investment management at Athens-based Piraeus Bank SA.
“That’s not a bad place to be,” he said.
Elliott, the son of a U.K.-born father who moved to Athens to start a business exporting clothing in the 1970s and a Greek- born mother, is adamant Greece will remain in the euro.
Europe has incentives to prevent an exit, including risks to institutions such as the European Central Bank that hold billions of dollars of Greek sovereign debt and the likelihood that contagion will spread to Spain and Italy, prompting depositors to accelerate bank withdrawals, he said.
Greek politicians will also do what’s necessary to keep the country in the euro because property owners would face massive wealth destruction following a return to the drachma, Elliott said. Regardless, he intends to focus on companies that are generating revenue and trying to expand their businesses, not investments that emerge simply because of a weaker currency.
“If we go to the drachma again, there will be tremendous amounts of money to be made for speculators,” he said. “Whether we are going to take advantage of such a situation and try to make money on the back of a population that is really going to have a tough time is going to be a tough debate for me. I don’t know whether I would be able to do it.”
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