Greece’s rumbling debt drama is spurring more negative bets on a popular exchange-traded fund (ETF) tied to the country’s stock market, casting a shadow over a vehicle that has lured top global investors.
ETFs reflect a basket of underlying assets — roughly $300 million worth of Greek stocks in the case of the ‘GREK’ Greek ETF — and are tradeable on international stock markets.
Global investors looking for exposure to Greece, which has shown signs of recovery but remains scarred by the debt crisis of the last five years, have alighted on the ETF as a way to trade the country while avoiding the risk of owning shares of individual Greek companies.
Now, as acrimonious negotiations with creditors reignite fears that Greece won’t meet a June deadline to repay money owed to its lenders, investors are again increasing their bets against the Greek ETF.
Data from financial information company Markit showed that the amount of the ‘GREK’ Global X FTSE Greece 20 ETF loaned out to speculators, betting on it then falling, has risen over the last month.
“It’s not unreasonable that ‘short interest’ is increasing, given how imminent the deadline is,” said Kateryna Taousse, director and distressed debt sector specialist at PAAMCO.
To profit from an asset price going down, short sellers such as hedge funds can borrow a security and sell it, expecting it will decrease in value so they can then buy it back at a lower price and keep the difference.
Short interest on the Greek ETF — as measured by shares out on loan — surged from 5 percent to 20 percent at the end of last year, as worries over Greece resurfaced, even though many investors expect Greece to remain in the euro zone.
These bets have been volatile, with traders moving quickly to shut down negative bets on positive newsflow. The short interest level on the Greek ETF slumped to around zero percent in April, but it has since increased back to 5 percent as anxieties over Greece returned.
According to Reuters data, the top five holders of the ETF as of end-March 2015 included Omega Advisors, BlackRock and City of London Investment Management.
The ‘GREK’ ETF itself is down around 10 percent since the start of the year, with Greece due to make debt repayments — after a huge international bailout programme — later in June. Failure to do so could potentially lead to its exit from the euro zone.
Ilya Feygin, senior strategist at WallachBeth Capital, said one advantage of the ‘GREK’ ETF was that US investors could trade the Greece situation when the Athens’ bourse was shut.
This was particularly useful since political developments concerning Greece had often emerged during US market hours, after European stock markets had closed down, he said.
The Greek trade is a particularly risky one for investors, given that Greece is seen in the market as a “binary” event – meaning Greek assets can either surge or slump based on comments from Greek politicians or the country’s creditors.
Some traders have looked to hedge their bets on the Greek ETF by taking out bullish “call” options to bet on any spike higher.
Nevertheless Toby Campbell-Gray, head of trading at Tavira Securities, said most hedge funds were still making negative bets on the Greek situation.
He said that while the majority of these centered on the euro currency, the Greek ETF offered similar opportunities.
“They will be playing the ‘short’ side via the ETF. Hedge funds are pretty nimble, they can get in and out of these things pretty fast, but there is a large ‘short’ overlay on Greece,” he said.
Feygin added that while further compromises on Greece’s debt payments were expected, the lack of overall clarity on the matter meant the Greek ETF could face more pressure. [Reuters]