Analysis: As euro steadies, fund managers hedge bearish bets

Tue Dec 27, 2011 3:56pm EST
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By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) - The European debt crisis roiled markets all year, producing the most volatile trading since the 2008-2009 meltdown. That is, except in one market -- the euro.

Fund managers that bet on a volatile, wild year of losses in the euro are paring back positions against the single currency going into 2012 after its surprising resilience to Europe's sovereign debt crisis damaged their portfolios.

Many still expect market turmoil arising from Europe's debt situation and have kept options strategies that will benefit from volatility. But they have put on trades that will pay off as well if the euro zone recovers from the crisis.

While Europe's debt drama kept markets on edge for most of the year, the euro is only down 2.6 percent against the dollar in 2011.

That is not as bad as headlines from the crisis might have suggested. This slashed returns for investors who paid premiums for strategies aimed at capitalizing on a sharp fall.

"Our mistake this year, especially in the first half, was looking a lot at headlines in the euro zone and trying to read the politicians' complete nonsense," said Harald Hild, portfolio manager at FX fund of funds Quaesta Capital in Zurich, Switzerland.

Hild runs the FX Volatility fund under the Quaesta group, with assets under management of about $3 billion.

"For most of the year, we were in a risk-off mode and we were paying high premiums for downside strikes in the euro and nothing really happened. So we started to look at it from a different perspective."   Continued...