Investors hedging against Greece, but there's no panic

Global investors are hedged against a potential exit of Greece from the euro zone ahead of Sunday's referendum, but they're not betting on a huge fallout in financial markets even if there is a negative outcome.

Currency, bond, and equity investors have turned defensive, trimming exposure in the euro zone. They're generally of the mindset, though, that a last-minute deal will be struck and it will be an opportunity to snap up euro zone assets again.

Greeks are set to vote on Sunday on whether to accept austerity terms in order to continue receiving international aid. Most U.S. investors expect them to approve the terms, though polling in Greece is unclear.

"You definitely want to protect portfolios and not experience big drawdowns in the face of volatility," said Raman Srivastava, co-chief investment officer and managing director of global fixed income, at Standish Mellon Asset Management in Boston. The firm oversees $170 billion in assets.

Standish has never owned Greek debt, but as a safety measure, it sold peripheral bonds such as Portugal and Spain toward the end of the first quarter, Srivastava said. It also temporarily bought safe-haven German Bunds.

The expectations for more gyrations can be seen in currency hedging. One-month implied volatility in the euro's exchange rate against the dollar, for instance, has been on an uptrend since August of last year.

In equities, there has been increased hedging. Open interest in S&P 500 put options, which rise in value if the stock index declines, jumped nearly seven percent to 7.7 million contracts on Monday.

Open interest in CBOE Volatility Index call options, typically used to bet on a rise in volatility, has increased to 5.4 million contracts, up 6 percent from Friday. Calls betting on the CBOE Volatility Index, or VIX, Wall Street's favored anxiety gauge, rising above a reading of 23 by mid-July are the biggest block of open interest at nearly half a million contracts. The spot VIX is currently trading at 17.

Still, there is no sense of panic among equity investors, market participants said.

"All the evidence suggests folks who were inclined to hedge against this kind of scenario have been doing so for some time and that reduces the probability of a panic washout," said Jared Woodard, equity derivatives strategist, at BGC Partners in New York.

Joe Smith, senior market strategist at CLS Investments, a $6.5 billion asset manager which uses exchange-traded funds, said the San Francisco firm has gone into defensive mode since the fourth quarter last year. He said the firm has bought the iShares MSCI EAFE Minimum Volatility ETF, which gives exposure to less risky developed market equities.

CLS has also bought European currency-hedged ETFs.

In the currency space, investors have started to express their bearish view on the euro in ways other than buying the dollar, which is viewed as a 'crowded' trade. Now, they're looking at the yen, as euro/yen has gained 7.2 percent in the last two-and-a-half months.

"The commonly-held view of continuous yen depreciation is being questioned now," said Richard Benson, co-head of portfolio investments at Millennium Global in London, managing $14 billion in assets.

Benson, who did not disclose his firm's position on the euro, said a short euro/yen trade has outperformed going short euro/dollar. (Reporting by Gertrude Chavez-Dreyfuss and Saqib Igbal Ahmed; Editing by Andrew Hay)