Euro Crisis: Hedge Funds and Short Selling

When everyone is interpreting whether funds are short selling euro, U.S. regulation departments already begin investigating whether hedge funds plot to short euro together.

Soros's SAC Capital and Paulson's Greenlight Capital have been asked to keep records of euro transactions and email correspondence. A further probe of their investment activities on euro is imminent. Since the Greece crisis, Euro has dropped to 1.35 against dollar in a short period of time. Many financial tycoons and investment experts think that the European Union is in deep trouble and that euro might even fall to same value as dollar.

Looking back, euro did have an incredible volatility over the past months. When U.S. job report came out strong in December, euro fell by 1.5%. Then again in December, when Standard and Poor downgraded Greece's securities, euro again fell by 1.3%. In January, when Greece failed in the introduction of new bonds, investors lost confidence in Greece and euro fell another 1.3%. Short selling in euro increases to 77 thousand shares of funds, more than 5.5 times buying shares.

Many economists point out that many of these hedge funds, though shorting euro, buy Greece, Spain, Portugal and Italy's defaulted CDS at the same time. As trust in euro is lost, price of CDS significantly rises. The hedge funds then sell these CDS to investors who are panicking in looking to hedge European bonds in their hands.

Hedge funds' combined effort in short selling euro is not uncommon. In 1992 Soros and many others already short currencies to reap much profit, with European currencies eventually plunge deeper and deeper and Great Britain exiting the European currency system. Note that at that time there was no euro yet.

In the short run, euro's collapse is very unlikely. Today, euro transactions are above 1.2 thousand billion of volume so hedge funds' activities are not enough to completely smother euro.

Another inference is that investors might short euro to move market focus from U.S. bonds to euro and other European countries' securities. At this point in time, with infinite U.S. bonds sold, a huge tsunami of inflation is possible in the future. Soros and Paulson's investment strategy report shows that they are already moving into gold. Moving into euro and European bonds might be another exit strategy for them.