Top Hedge Funds Bet on Greek Banks

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Some of the world's leading hedge funds are pouring money into the Greek banking sector in expectation of huge potential returns, even as the country struggles to right its economy in the face of deep government spending cuts.

Farallon Capital, York Capital Management, QVT Financial and Dromeus are among hedge funds that are set to participate in the recapitalization of the country's banks.

The hedge funds are among the largest institutions involved in a €550 million share issue from Alpha Bank, Greece's second-largest lender, set for completion in mid June, said people familiar with the plans.

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Others understood to be looking at bank investments include Third Point, which last year made $500 million by snapping up cheap Greek government bonds and CQS, Europe's largest credit hedge fund.

Farallon, York, CQS and Third Point declined to comment. QVT did not respond to requests for comment on Friday.

Some hedge fund managers believe a wager on the country's banks could prove even more lucrative than other bets on the recovery of Greek markets.

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"This is the mother of all recovery trades," said Achilles Risvas, the managing partner of Dromeus, which launched a Greek-focused hedge fund last year. "The situation is hugely attractive because of the asymmetry of the pay-off."

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The private sector investment in Alpha Bank is to be matched by a €4 billion cash injection by the EU-backed Hellenic Financial Stability Fund.

Hedge funds have been lured to participate because of the potential returns they can make through special warrants attached, for free, to the new issue of bank shares.

"The troika have ended up making this an incredibly good deal for the hedge funds," said a portfolio manager at one of the firms involved. Funds have only been allocated "about a third" of what they asked for, he said, showing the extent to which they were keen to participate in the trade.

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The Alpha Bank warrants are exchangeable, on a semi-annual basis, for between 7.3 and nine shares, bought back from the HFSF, at the shares' issue price.

"It is free leverage with limited downside," said Mr Risvas. "A 50 percent move in the share price would result in a 400 percent increase in the warrant value," he said.

Although Greek authorities hope to repeat the success of Alpha Bank's fundraising with other banks, hedge funds are more cautious. Some are looking at participating in the parallel Piraeus Bank recapitalization. But many say the case is different for the National Bank of Greece, a more likely candidate for near-total nationalization.