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)