For hedge funds, debt crisis largely business as usual

Thu Oct 17, 2013 9:11am EDT
 
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By Svea Herbst-Bayliss and Katya Wachtel

BOSTON/NEW YORK (Reuters) - Hanging tough seems to have been the right strategy for a good number of money managers now that Congress has approved a stop-gap deal to avoid a federal debt default and reopen the U.S. government.

Hedge fund manager David Tawil said that, after living through the collapse of Lehman Brothers, many on Wall Street are now well-versed in telling a real financial crisis from one that is more of the smoke and mirrors variety and much more easily fixed.

The manager of the $60 million Maglan Capital, which trades mainly stocks, did not do anything particularly different with his portfolio during the three weeks Republicans and Democrats battled over a plan to reopen the federal government, and come up with an agreement for lifting the nation's debt ceiling.

"Those of us who invest on the basis of assigning probabilities to various outcomes, essentially gave this one a zero," said Tawil of the prospect of Congress not raising the country's borrowing ability and letting the federal government default on its debt obligations.

Tawil and other hedge fund managers spoke to Reuters ahead of Congress voting on the fiscal deal.

Tawil's hang tough strategy made a lot of sense with his fund up 34 percent this year, compared with a 5.6 percent gain for the average hedge fund.

Other money managers also said the political theatrics of the past few weeks were more of a nuisance than a real threat.

Some of that is because managers have already been through a series of politically provoked fiscal crises beginning with the 2011 debate to raise the debt limit, the battle to raise taxes on the wealthy and the more recent fight over sequestration and automatic budget cuts. In all of these situations, Wall Street saw a potential crisis averted by a last-minute deal hammered out by the political parties.   Continued...

 
The U.S Capitol Building is pictured at sunset in Washington, October 11, 2013. REUTERS/Jason Reed