Betting Against Greece and Italy Backfires for Hedge Funds

Some of the world’s leading hedge funds, including Citadel, Marshall Wace and AKO Capital, are currently dealing with losses after betting against Greek and Italian companies.

Amidst worldwide fears of the coronavirus pandemic driving down stocks in recent months, there has been an incentive to short sell company shares. Essentially, by quickly selling borrowed shares in the hopes of buying them back more cheaply in the future, hedge funds can pocket the profit.

For countries like Greece and Italy, where their economies are expected to suffer this year due to their dependence on tourism, this makes them a huge target of this practice.

However, with the European Union’s breakthrough plan of a 750 billion euros ($808 billion) recovery fund, stock markets have now begun to surge across southern Europe.

As a result, countries including Greece and Italy will benefit enormously from this proposal, which spells bad news for hedge funds hoping to short-sell their company shares.

Despite this, however, these Southern European countries are still not out of the woods quite yet.

In the instance of a new coronavirus crisis, for example, countries such as Greece and Spain would be hit the most. If that happens, their markets would become a prime target for short-selling.

Hedge funds would be prepared for this eventuality as well, as many still hold short positions on companies, including Italy’s Banco BPM and Greece’s Piraeus Bank. These were secured before the June 18-19 European Union virtual summit, which was when the recovery fund was discussed.

With current European short-selling laws requiring hedge funds to disclose bets of 0.5 percent and above for total shares, it is currently unclear if they have tried to offset these trades.

As Greece reopens for the 2020 tourist season, only time will tell how the country’s economy will respond to both the effects of the recovery fund and to the revenues earned by one of its largest industries.