Greece Crisis: Any opportunity for Hedge Funds?

-->

My take on how Hedge funds can benefit by investing in distressed assets amid the ongoing Greece Crisis

The crocodile’s eyes are not shedding tears this time. Rather they are lit up with the prospect of a Greek Sovereign default. Most Hedge funds (stakeholder love calling them crocodiles) are under invested in European banks and financial institutions so they are likely to take a relatively light hit as compared to post Lehman crisis. They are also well placed with respect to cash positions primarily because of low investment opportunities in the developed world particularly in the US.

So even the slightest prospect of a Greek Default and a resultant exit from Euro is making the Hedge Fund managers sit up and take notice. An exit from Euro will stretch the Greece economy beyond its means and a bank run will render many businesses bankrupt; particularly the one’s with exposure to other parts of Europe. A business which has Euro debt to pay to financial institutions and banks outside Greece would risk default. The Greece will have a weaker currency post the default and the Euro will strengthen.

A weak currency will make Greece attractive, particularly to Euro zone. Holidaying in Greece will be cheaper for Europeans as Euro will buy more Greece currency. Similarly investing or buying a business in Greece with real assets (say a luxury beach resort) will make economic sense. Hedge funds look for opportunities to buy cheap and sell high by adding value. They may buy businesses in Greece, bargain with creditors for a haircut and keep the business solvent. They may then add value and sell it for a huge profit a couple of years down the line. Buying such claims would be like investing in distressed assets so the risk /return payoff would not be linear. Rather the risk/ return would resemble that of a call option. 

Investors and fund managers who are ready to take the extra pain of searching value in the abyss by careful and well structured valuation would find this crisis a blessing in disguise.

My take: Look for a 40-50 room beach hotel in Thessaloniki or Mykonos with debt on its balance sheet. You may be able to pick it up lower than its real asset value.