For a few hedge funds, Greek debt is turning into one of the trades of the year.
News that Athens — backed by euro zone ministers and the International Monetary Fund — will buy back some its own debt from private investors sets a floor under the price of its bonds, handing many who picked them up at rock-bottom levels big gains.
The funds - which include Daniel Loeb's Third Point - have spent months building up positions in the debt-beleaguered country's bonds, rightly betting that their price would rise as the risk of a Greek exit from the euro zone receded.
Some have already banked profits from that bet, but indications Athens will target a cost of around 35 cents on the euro in its buyback plan, if successful, is a boon for those still holding the bonds.
"This is very positive and a huge step forward," Achilles Risvas, chief executive officer of hedge fund Dromeus Capital said. "The probability of a Grexit has decreased significantly." Risvas owns Greek bonds currently trading at 28.5 cents on the euro, bonds he bought at 18 and 19 cents.
Hedge funds — secretive funds that can bet on rising or falling prices in a wide range of markets — have often played a controversial role in government bond markets.
Many have attracted criticism for betting against the fortunes of European countries — including Greece — during the euro zone debt crisis, and prompting Europe to ban "naked" short-selling of sovereign credit default swaps (CDS), a product that insures the buyer against default.
For most funds their current Greek debt holdings represent a relatively small position of their portfolios, although the gains can be large.
Others are sitting on even bigger gains.
Third Point, a $9.3 billion hedge fund run out of New York, said in a regulatory statement earlier this month Greek government bonds were one of its top five "Winners" in October.
The fund had bought the bonds for about 17 cents, Loeb told investors in an October 3 letter seen by Reuters.
London-based hedge fund Adelante Asset Management first bought Greek bonds at 12.5 cents. It has sold part of the position, making a 70 percent gain, but CEO Julian Adams said it still has a holding and described the deal as a "good" one.
Adams said the trade was by no means over. "Now the country has a chance to go forward on a more sustainable footing... Plus with all the relief they are getting and the cash you should start to get some growth."
Euro zone finance ministers and the International Monetary Fund (IMF) agreed on Monday to cut Greece's towering debt pile by 40 billion euros ($51.72 billion), cutting it to 124 percent of gross domestic product by 2020.
Importantly, ministers also committed to taking further steps to lower Greece's debt "significantly below 110 percent" in 2022 - a veiled acknowledgment that some write-off of loans may be necessary from 2016.
Athens is yet to give details of the debt buyback - to avoid giving hedge funds an opportunity to push up prices - but one proposal is to borrow 10 billion euros from the euro zone's rescue fund.
This would allow Greece to buy around 30 billion euros worth of bonds, cutting its outstanding obligations by around 20 billion euros.
However, the buyback will only work if enough investors agree to sell their bonds - by no means guaranteed. Some may prefer to stay out of the deal in the hope that others accept the buyback, cutting Greece's debt and boosting the value of their own bonds.
"Every bondholder will be aware that if they were the only one not to participate then default probabilities plummet, and we think the strip could be valued at around 50 (cents on the euro)," Gabriel Sterne, an economist at Exotix, wrote in a research note.
Dromeus' Risvas said a price of 35 cents was unlikely to encourage him to participate, but that the plan was still positive because it sets a floor to the price and — depending on the buyback's size — it could boost bond prices further.
"It's like a poker game. You need to understand what everyone else is going to do first," he said, noting that much depends on how the government proceeds with the buyback.
Using a Dutch auction — where the price is set after taking in all bids and determining the highest price at which enough investors accept a total buyback — is likely to elicit more success than a single across-the-board price, Risvas said.
But while markets and hedge funds reacted positively to the plan, huge risks remain and mainstream investors are still cautious about buying into the debt of a country stuck in the depths of a five year long recession.
"You can flip a coin and you might make some money. But other than for hedge funds...it's very difficult for us to play it," said Richard Cookson, Global Chief Investment Officer at Citi Private Bank, speaking at Reuters Global Investment 2013 Outlook Summit held in London on Tuesday.