Hedge funds hold out for more from Greece

(Reuters) – Hedge funds are preparing to resist Greece’s attempt to cut its debt by holding out against a government bond buyback in the hope of bigger gains further down the line.

Greece had to offer a higher price than expected at a 10 billion euro

Resisting the urge to bank a quick profit, hedge funds will rely on the fact many bondholders will tender their holdings in the buyback. That will leave Greece with less debt, underpinning the value of what remains.

Some managers are now convinced that international lenders will do whatever it takes to keep Greece in the euro, improving the chances of payouts to bondholders.

Hans Humes, chief investment officer of New York-based Greylock Capital, said he planned to hold onto shorter-dated bonds, tender his long-dated Greek bonds in the buyback and then buy more shorter-dated debt, keeping the size of his positions in the country’s debt about the same.

“Where else are you going to get such a great yield in the short end?” he said. “There is nothing else as good as this from a risk-reward perspective in Europe right now.

“They are well on their way to managing the (economic) situation. After this transaction, I think Greece is going to have a lot more people looking at (buying) their bonds.”

Others said the buyback had put a floor under the price and limited the downside while still offering potential future gains.

“We may tender at the higher end of the range but have not decided yet,” said Julian Adams, CEO at Adelante Asset Management. “(There) does not seem to be much downside in not participating.”

Hedge fund holdouts are unlikely to prevent the buyback from getting over the line, according to Nomura analysis, because of participation from banks. Hedge funds were estimated to hold up to 25 billion euros out of the total 63 billion in private creditors’ hands.

ARGENTINE PRECEDENT?

Funds are wary of disclosing whether or not they will accept the buyback for fear of weakening their positions. Many will be hoping others will take up the offer, increasing the potential payout for themselves.

Those that do hold out may take comfort from Greece’s about-face in May when it paid in full the holders of one bond who rejected debt exchange in February. The government had said at the time of the offer in March that anyone who rejected it would get nothing.

Funds will also be buoyed by legal safeguards they now enjoy as bondholders. Under Greece’s 206 billion euro restructuring in March, old Greek law bonds were traded in for new bonds issued under English law, which offers investors more protections.

Managers are also getting excited about court rulings in the long-running legal battle between Argentina and holdout creditors, including U.S. hedge fund Elliott Management, which have said Argentina must pay holders of restructured bonds and holdouts simulta