Panic Among Hedge Fund Investors in Greece
David Einhorn is among the hedge fund investors who have collectively poured more than 10 billion euros into Greek bond, bank stocks and other investments.
ATHENS — For investors around the world looking at Greece, there was but one question Sunday: What is going to happen when the markets open on Monday?
That question is particularly acute for the hedge fund investors — including luminaries like David Einhorn and John Paulson — who have collectively poured more than 10 billion euros into Greek government bonds, bank stocks and a slew of other investments.
This weekend, Nicholas L. Papapolitis, a corporate lawyer here, was working around the clock comforting and cajoling his frantic hedge fund clients.
“People are freaking out,” said the 32-year-old Mr. Papapolitis, his eyes red and his voice hoarse. “They have made some really big bets on Greece.
But there is no getting around the truth of the matter, he said. Without a deal with its European creditors, the country will default and Greek stocks and bonds will tank when the markets open.
On the ground here, the surprise decision of the Greek prime minister, Alexis Tsipras, to hold a referendum has turned what was a bank jog into more of a sprint with most Greeks now fearing that the country’s depleted banks will be closed on Monday.
Panicky depositors spent the weekend pulling an estimated one billion euros from the banking system, stashing the cash in their houses or exchanging them for bulging bags of gold coins.
The yields on Greek government bonds, now around 12 percent are expected to soar as investors rush to unload their positions in a market that of late has become extremely hard to trade.
Bank stocks, if the stock market, in fact, opens, will also be hit with a selling wave, as they cannot survive if the European Central Bank withdraws its emergency lending program.
There are not as many hedge funds in Greece as there were a year ago, when it is estimated that around 100 foreign funds were sitting on big investment stakes. Their bet was that the previous Greek government would be able to complete the arduous process of economic reform in Greece that started five years ago.
The country became the epicenter of Europe’s debt crisis after Wall Street imploded in 2008. Now, it is struggling to pay its debt, and its people and creditors are growing restive.
When it became clear that a radical Syriza government under Mr. Tsipras would come to power, many investors quickly turned heel, dumping their Greek government bonds and bank stocks in large numbers before and after the election.
But a brave, hardy few stayed put — around 40 to 50, local brokers estimate — taking the view that while the new left-wing government could hardly be described as investor friendly, it would ultimately agree to a deal with Europe. It would be a bumpy ride for sure, but for those taking the long view that Greece would remain in the eurozone, holding onto their investments as opposed to selling them in a panic seemed the better course of action.
For now, at least, that seems to be a terrible misjudgment, especially if Greece defaults and leaves the euro.
Most of the hedge fund money in Greece is invested in about 30 billion euros of freshly minted Greek government debt securities that emerged from the 2012 restructuring of private sector bonds.
The largest investors include Japonica Partners in Rhode Island, the French investment funds H20 and Carmignac and an assortment of other hedge funds like, Farallon, Fortress, York Capital, Baupost, Knighthead and Greylock Capital.
A number of hedge funds have also made big bets on Greek banks, despite their thin levels of capital and nonperforming loans of around 50 percent of assets.
They include Mr. Einhorn at Greenlight Capital and Mr. Paulson, both of whom have invested and lost considerable sums in Piraeus Bank. Fairfax Financial Holdings and the distressed investor Wilbur Ross own a large stake in Eurobank, one Greece’s four main banks.
Big positions have also been taken in some of Greece’s largest companies. Fortress Capital bought $100 million in discounted debt belonging to Attica Holdings, Greece’s largest ferry boat holder. York Capital has taken a 10 percent stake in GEK Terna, a prominent Greek construction and energy firm.
In 2014, Blackstone’s credit arm bought a 10 percent chunk of the Greek real estate developer Lamda Development. And Third Point, one of the earliest, most successful investors in Greek government bonds, has set up a $750 million Greek equity fund.
Many of these forays were made during the heady days of 2013 and early 2014 when the view was that, in a rock bottom global interest rate environment, risky Greek assets looked attractive, especially if the reform process continued.
Among the most dubious of these, was a 10 percent equity stake, then worth about $137 million, that Mr. Paulson’s hedge fund took last year in the Athens water monopoly. The company had little debt and was slated to be privatized, making it an attractive prospect at the time.
But the privatization process is now frozen and the monopoly is struggling to collect payment on its bills from near broke government entities, making it unlikely that Mr. Paulson will get much of his money back.
To be sure, many of these hedge funds are enormous and their Greek investments represent a fairly small slice of their overall portfolio.
Mr. Papapolitis, who used to work at Skadden Arps law firm in New York structuring exotic real estate deals, moved back to Greece in 2008 and has led some of the biggest hedge fund deals in the market.
Of the same age and generation as many of his clients, he feels their pain.
“These guys are my friends,” he said. “They invested in Greece when the economy was improving. And now this happens — I feel obliged to be there for them.”
He is not the only point man for hedge funds coming to Greece.
Last week, a group of about 12 of the largest remaining hedge funds arrived in Athens to attend a seminar organized by George Linatsas, a founding partner of Axia Ventures, an investment bank that specializes in Greece, Cyprus, Portugal and Italy, as well as shipping.
With all the large investment banks and law firms having largely given up on Greece, Mr. Linatsas and his team of analysts became the main port of call for hedge funds that started buying Greek government bonds in 2012.
Then, the bonds were trading at 12 cents on the euro and they soon shot up to 60 cents, making billions of dollars for those early investors.
“People made their careers on that trade,” Mr. Linatsas said. “The problem now is politics and whether there is a government that can take this country to the next stage.”
The outlook seems grim.
Indeed, in recent months these investors have spent little time breaking down balance sheets or discounting cash flows. Instead, they have spent every effort trying to figure out what the Syriza government is up to.
Some have tried to get an edge by listening to Greek radio. Others have hired outside firms to study video clips of Mr. Tsipras and his finance minister, Yanis Varoufakis, to try and discern from body movement and voice tone whether they are telling the truth. And an increasing number have resorted to begging journalists for inside scuttlebutt.
Because few Syriza officials will meet with the investors, a large number of them have banded together, an unusual occurrence in an industry that puts the highest of premiums on secrecy. They exchange tips and theories via emails when they are apart and over wine-soaked dinners in Athens during their frequent trips here.
At times the swankiest hotel in town, the Hotel Grande Bretagne (or G.B. as it is commonly known) is so chock full of hedge fund executives (mostly in their 30s) that some have called it the G.G.B. — the acronym for Greek government bonds.
In recent days, as it has become clear that the Syriza government was not going to accept the latest proposal from its creditors, stress and anxiety has, in some cases, turned to outright anger.
“I just can’t believe these guys are willing to torch their own country,” one investor with a large holding of Greek bonds lamented in an email. “They thought this was a game. Now, when the supermarkets run out of food, gas stations run out of gas, hospitals have no medicine, tourists flee, salaries don’t get paid because banks shut — what are they going to do?”
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