The first point is that the Greek equity index level is very stretched: RSI is now over 70 and price levels already reached the upper Bollinger band. Although this would already be enough to short the index, a closer look at historical data corroborates this feeling. The true driver seems to be speculation; indeed historical weekly Vol. is around 27% and GARCH short-term predictions are in line with that. Moreover many investors have already set up long positions, making it is more likely to see a take-profit over the latter rather than the further initiation of new ones. This eventually puts more pressure on the downside.

On the other side, FTSE 100 provides an interesting entry opportunity as the total return on the index YTD is slightly positive compared to stronger performances of other indexes. Moreover the FTSE 100 is pretty exposed to emerging markets, which may outperform in the oncoming days pushed by a still loose Fed MP and the consequent flow of capitals looking for returns.

Finally, we have declining rates in the developed markets and this is making equity there more attractive.

Time horizon: 2 weeks; Exposure ratio: 1:2.

Note that ASE:IND is much more volatile that UKX:IND, thereby, in order to balance the risk exposure wrt both legs of the trade, it is necessary to overweight the notional of the UK leg.


Leonardo Pisano · 12 October 2013 at 23:12

”The true driver seems to be speculation”….?! – Maybe one of the drivers is that IMF expects Greece to have a 0.6% growth in GDP next year (up from -4.2% this year)…..get your research straight!

    BSIC · 14 October 2013 at 21:30

    Hi Leonardo,
    Thank you very much for your comment. When we talk about “speculation”, we refer to the fact that the main buyers of this position are fast money (e.g. Hedge Funds) rather than real money. As you know, the formerS tend to hold the position for much less and to take-profit more quickly rather than waiting for the fundamental (such as GDP growth) scenario to play in. We believe that the majority of the flow is already in (I started to hear about this trade in the last days of my internship in late August) and so this trade offers an asymmetric risk-reward profile. Indeed, any “delusion” can push the holders of this position to liquidate the trade and so there is a lot of room for downside. On the other side, we believe that the initiation of new long positions is unlikely so there is no much room on the upside. Indeed, the current macro scenario is too uncertain to push more risk-adverse investors (real money) to enter the trade.
    Clearly, we may be wrong but this trade has a good risk-reward profile and so if we can initiate many of this kind of trades we should be profitable in the long run.
    Finally, other members of the club outlined that IMF forecast has proven several times wrong so they may not be so indicative.

      Leonardo Pisano · 15 October 2013 at 13:24

      You started to hear about the trade in late August, but it was no secret that hedge funds were going into Greece. In late July, Einhorn’s (Greenlight capital) bullish position in Greek financials (second highest weight on the Greek bourse) was already public news. This move was probably stemming from the new government plans for privatizations and re-prevatizations, but this is just my personal ‘speculation’.
      Now, you’re right about one thing, fast money is fast money. But even hedge funds (like Paulson’s and Einhorn’s hedge funds) sometimes have legitimate reasons when they invest. And, fast probably isn’t as fast as you think. Eg. Paulson is long Greece because of the growth in tourism and exports (at least that’s what he says). Now these factors may not be enough for risk averse investors to enter the trade, but my point is: why did you put such a short horizon of two weeks on this trade? However,maybe we just have different opinions.

      You say FTSE 100 is exposed to emerging markets so it may actually outperform, but Russell investments and MSCI have both demoted Greece to emerging market status a couple of months ago (which by definition means that the country you have shorted is more exposed to emerging markets than FTSE). About 8 Greek blue chips (including Alpha bank and National Bank of Greece) are now gonna have emerging markets status and they will get more attention and visibility, and with a continued QE (at least that’s what the market believes now that Yellen is there), these companies will see even more inflow of capital.

      ps. About the IMF part, it is obviously true that the IMF has mis-predicted in many cases very important variables, among which, the most infamous ones are: the duration of this crisis, the unemplyment rate during this crisis etc.That does not mean that the IMF is incapable, it only means that economic forecasting resembles coin tossing more often than not. However, markets still incorporate the views of this very influential institution when data is released.

Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *