08.31.2011
By Terry Flanagan

Hedge Funds Respond to Europe’s Woes

Like others market participants, hedge funds navigate the Eurozone’s debt by avoidance.

Chief economist Constance Hunter, of Aladdin Capital Management, is watching how Germany’s upcoming political events unfold.

“Germany has two important political events in September, on the 7th the constitutional court votes on the legality of the EMU (European Monetary Union) bailout packages and on the 23rd, the Bundestag votes on the latest version of the ESFS (European System of Financial Supervisors),” Hunter noted. “There are more and more German political and economic leaders speaking out against the Euro and the bailouts.”

Rising resistance to bailouts do not bode well for isolated European nations struggling with debt, and is front and center to the concerns of hedge funds and their investors with exposure in the region.

Aladdin manages 17.5 billion under management. The firm’s alternative investment exposure spans globally, and the firm’s Global Markets business provides secondary market solutions and advisory services.

Alleged Eurozone leader Germany’s disdain over the fiscal problems of its European peers may be a leading contributing cause of a pending Eurozone breakup, though “it is unclear how the Eurozone breakup will occur—whether the center will kick out the periphery or vice versa,” according to Hunter. “Greece is not able to grow its way out if its problems and the ECB (European Central Bank) debt purchases are merely postponing the inevitable: a restructuring of debt for the unsustainable countries.”

For hedge funds like Aladdin with exposure to strategies that rely on Europe, the key is to remain out of “the peripheral debt,” Hunter told Markets Media. “Most hedge funds are out of the peripheral debt and so are the smart long only managers for that matter,” she said.

As the Europe’s debt woes continue, Hunter is bearish on the strength of the region’s united currency. “The strength of the Euro is something that we don’t believe will last once the ECB has to take back the two rate hikes,” Hunter remarked. “The ECB made a policy mistake that will be reversed and this will impact the Euro.”

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