Its a cruel world in finance. After working their way through Greece and Spain, hedge funds are now eyeing up whats on offer in Spain.

(Reuters) – Hedge funds have spotted money-making opportunities in Spain, betting that market fears over the southern European country’s deepening debt crisis have made some assets too cheap relative to other securities.

Managers have been exploiting what they see as the mispricing of credit default swaps, government and corporate bonds and stocks, after months of growing market concern that Spain might need an international bailout, using relative value trades – betting on one security versus another.

The moves echo the earlier stages of the euro zone crisis, when hedge funds – renowned as being among the nimblest of investors – bought CDS – designed to pay out in the event of default – on Greece and other weaker euro zone countries.

When the trade became more popular they quickly took profits and moved onto countries such as France and Belgium.

Spanish stocks are already suffereing.

Spain’s stocks .IBEX have tumbled 17.1 percent this year while the 10-year government bond yield has risen from less than 4.7 percent at the start of February to more than 6 percent earlier this week as investors fretted over its debt-laden banks and consumers and its shrinking economy.

A number of hedge funds bought Spanish CDS at the start of the month, say industry insiders, helping drive up the price to more than 500 basis points earlier this week from below 350 basis points in February.


Some funds who have long-term bets on Spanish banks recovering and who are unwilling to sell at current prices have gone short a basket of Spanish stocks as a hedge, specially weighted to counter further sharp falls in bank stocks.

“If banks are a long-term position for you you’ve maybe put on a market hedge, but because banks have higher beta you’ve overhedged,” the prime broker said.

Its not just Spain who should be worried. France has not escaped attention either.

“We all agree that Spain is facing many difficulties, but so are other neighbouring countries. I find it more interesting to buy France or Portugal CDS at current levels,” he said.

“France is interesting, as, if Mr (Francois) Hollande is elected President, he will certainly request an audit of public accounts, which will certainly not look nice.”

Source : Reuters