Nomura rounds up markets’ biggest misses in 2016

Forecasting markets a year in advance is never easy, but with “year-ahead investment themes” season well underway, Nomura has provided a handy reminder of quite how difficult it is, with an overview of markets’ biggest hits and misses (OK, mostly misses) from the start of 2016. The biggest miss among analysts, according to Nomura’s Sam […]

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Spanish construction rebuilds after market collapse

Property developer Olivier Crambade founded Therus Invest in Madrid in 2004 to build offices and retail space. For five years business went quite well, and Therus developed and sold more than €300m of properties. Then Spain’s economy imploded, taking property with it, and Mr Crambade spent six years tending to Dhamma Energy, a solar energy […]

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Euro suffers worst month against the pound since financial crisis

Political risks are still all the rage in the currency markets. The euro has suffered its worst slump against the pound since 2009 in November, as investors hone in on a series of looming battles between eurosceptic populists and establishment parties at the ballot box. The single currency has shed 4.5 per cent against sterling […]

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RBS falls 2% after failing BoE stress test

Royal Bank of Scotland shares have slipped 2 per cent in early trading this morning, after the state-controlled lender emerged as the biggest loser in the Bank of England’s latest round of annual stress tests. The lender has now given regulators a plan to bulk up its capital levels by cutting costs and selling assets, […]

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China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Archive | November, 2016

Investors take uneven gun view

Posted on 18 December 2012 by

If you were to look only at the numbers, and did not know what Freedom Group did, it might look like an attractive investment.

Underlying earnings for the first nine months of the year were up 43 per cent at $118m. Comparisons with the market valuations of similar companies suggest the business is worth about $1bn.

    But Freedom is the manufacturer of the Bushmaster .223 rifle believed to have been used to kill 20 children and six adults at the Sandy Hook Elementary School on Friday. That changes everything about the way investors will view it.

    Many will be barred from owning it, either by their general investment policies or by the terrible associations of the Bushmaster brand.

    Still, there are many investors that are prepared to hold shares in gun manufacturers, in spite of previous mass shootings.

    The California State Teachers Retirement System, Calstrs, said on Tuesday it had a 2.4 per cent stake in Freedom Group through its investment in funds run by Cerberus Capital Management.

    It is reviewing its investment in Cerberus, and suggested it would take a similarly negative view of any other company that bought Freedom. It promised to work to ensure that all its investments were taking social and human impacts into account.

    Calstrs is one of the largest investors in private equity, with $38.5bn under management in March, and has stakes in funds managed by Apax, Apollo, Blackstone, Carlyle and Bain Capital, among others.

    Some of those companies indicated on Tuesday they would not be interested in investing in Freedom Group.

    Apax Partners, the London buyout firm with large US operations, said on Tuesday it would never invest in firearms, tobacco or pornography.

    Apollo, a US buyout group, said it adhered to the Private Equity Council’s guidelines for responsible investment, which include consideration for “public health, safety, and social issues” associated with the companies that its member firms invest in. Bain Capital said it was also not interested in investing in Freedom.

    Many investors say refusal to invest in sectors such as gun manufacturing is not just a matter of principle, but also best practice for reducing business risk.

    Orin Kramer, head of Boston Provident, a hedge fund sponsor, and chair of the Robert F. Kennedy Center for Justice & Human Rights, said: “Fiduciaries don’t have to have liberal social values to care about the investment impact of decisions that ignore sustainability factors.”

    Blackstone, the listed alternative asset manager, has a minority investment in Colt Defense through one of its credit funds.

    The gun maker principally serves military and other official customers, but Blackstone took the decision to sell its stake earlier this year as part of a routine review of legacy investments.

    A spokesman for Blackstone said that when it comes to potentially sensitive investments, “we have no specific restrictions, but we have a general reputational filter that looks at a broad range of factors, environmental, social and others.”

    However, there are many investors that have stakes in listed gun manufacturers.

    Smith & Wesson manufactures a rifle similar to the Bushmaster, a variant of the AR-15 originally designed for the US military, which was one of the guns used at the cinema shooting in Colorado earlier this year that killed 12 people.

    It has institutions including BlackRock and Vanguard on its share register, according to Bloomberg, the information service.

    Like investors, US retailers also have an uneven attitude to guns. Dick’s Sporting Goods, a large specialist retail chain, said on Tuesday it was suspending sales of “modern sporting rifles” – the industry’s term for guns based on the AR-15 – at all of its more than 500 stories across the US.

    Walmart, the largest US retailer, has taken the listing for the Bushmaster down from its website, but was still advertising similar AR-15 variant rifles, including models from Colt of the US and Sig Sauer of Germany.

    Additional reporting by Anne-Sylvaine Chassany in London

    StanLife wins ruling over Lehman claim

    Posted on 18 December 2012 by

    Standard Life has won a court victory against a group of insurers that had refused to pay a £100m claim relating to collapse of Lehman Brothers in 2008.

    On Tuesday, the Court of Appeal backed an earlier court ruling that 11 insurers, led by Ace European Group, should pay out on a professional indemnity insurance policy taken out by Standard Life.

      Standard Life made its claim in early 2009, when it was facing mounting criticism – and the prospect of multiple lawsuits – over the valuation of its £2.2bn Pension Sterling Fund.

      The Edinburgh-based insurance and investment company had faced complaints from investors after adopting a new method of valuing the asset-backed securities in the fund, which resulted in an instant 4.8 per cent fall in the price of fund units.

      Standard Life had previously marketed the fund as a temporary home for short-term deposits, which led some investors to believe that it held their money in cash or near equivalents. Many expressed surprise that it invested in asset-backed securities.

      The Court of Appeal ruling noted that to “avoid and reduce the claims” and “further damage to the Standard Life brand”, the company had made a £100m lump sum payment into the fund, which effectively restored its value.

      Standard Life then made a £100m claim under its professional indemnity insurance on the basis that its actions averted a potentially larger losses and fell within the definition of “mitigation costs”.

      However, the insurers denied liability and refused to pay, challenging Standard Life’s interpretation of the policy.

      It is not yet known whether the insurers will now appeal to the Supreme Court.

      Sants secures £3m package at Barclays

      Posted on 18 December 2012 by

      Hector Sants©Shaun Curry

      Hector Sants will receive a total remuneration package worth as much as £3m as part of his move to Barclays next month, according to people familiar with the deal.

      The package will make the former chief executive of the Financial Services Authority, who is set to become Barclays’ head of compliance and government relations at the end of January, one of the 10 best-paid executives at the UK lender.

        Mr Sants is to be paid a base salary in line with the £700,000 earned by other top executives, though the annual bonus will be lower, at less than £1m, depending on performance, according to people briefed on the package. Up to £1.5m would be payable under a long-term incentive plan over at least three years, again dependent on performance.

        Barclays would not comment on the figures, but pointed out that executives’ LTIPs had paid out at only 37 per cent of the maximum over the past five years.

        Mr Sants, who was an investment banker with Credit Suisse before he joined the FSA in 2004, has told friends he was keen to abide by the pay principles he advocated as a regulator.

        While at the FSA, Mr Sants has been periodically vocal over banker remuneration, though his comments have been directed more at the structure of pay deals rather than the overall amount.

        “Inappropriate remuneration practices contributed to significant losses at major financial institutions and therefore to the severity of the current market turmoil,” Mr Sants wrote in the Financial Times three years ago. He said regulators should not be the judges of whether big pay deals “are somehow inherently immoral”, but argued that better structures – including the obligatory staggering over several years of a substantial portion of senior executives’ pay – were vital.

        Barclays said last week it was creating an executive-level role for Mr Sants, who will report directly to chief executive Antony Jenkins and manage the bank’s relationships with governments and regulators around the world. The former FSA chief was wooed by Sir David Walker, Barclays’ new chairman and also a former regulator.

        Mr Sants had chosen the Barclays role over a rival offer from Deloitte, which is believed to have offered him a package worth barely half what the bank is paying. Bankers said on Tuesday that Mr Sants had also held discussions with Deutsche Bank over a similar role, though that plan did not advance beyond a preliminary stage.

        Mr Sants’ appointment to Barclays is a key element in the bank’s mission to reinvent its image following a succession of reputationally damaging issues, including involvement in the Libor rate-rigging scandal, which cost it £290m.

        Aviva nets £500m for split with Bankia

        Posted on 18 December 2012 by

        Aviva is to net almost £500m by walking away from its Spanish joint venture with Bankia in a deal that ends a legal dispute between the UK insurer and the nationalised lender.

        The FTSE 100 group is to receive the cash payment from the Spanish bank in exchange for its 50 per cent stake in the life insurer Aseval, helping its efforts to shore up its balance sheet.

          Aviva had complained that an exclusive distribution agreement Aseval had with the UK group’s original joint venture partner, Bancaja, had been compromised after it was swallowed up by the deal that created Bankia.

          Bankia was formed out of seven Spanish savings banks in 2010 – including Bancaja.

          Aviva felt the merger breached the joint venture’s distribution arrangement as Caja Madrid – the largest savings bank within the new merged lender – already had a similar agreement in place with Mapfre, the Spanish insurer.

          Mapfre also bought a stake in Bankia during its flotation on the Madrid stock market in the summer of last year – which took place less than a year before the bank succumbed to the largest bank bailout in Spanish history.

          Aviva said on Tuesday that it and Bankia had applied to the Arbitration Court in Madrid, “to terminate the legal proceedings between the parties and issue an award which reflects the settlement agreed.”

          The UK company said the £494m it would receive from Bankia equated to about 1.8 times Aseval’s net asset value, on an IFRS basis. The cash proceeds would boost its economic capital surplus by about £500m.

          “This settlement is in line with our strategy to increase Aviva’s financial strength and we have realised significant value from our joint venture with Bankia,” said John McFarlane, chairman of Aviva.

          Bankia said it would consider selling part or all of Aseval at a later date, but had not made any final decision.

          The Spanish group added that it would not be able to calculate the final impact the transaction would have on its capital levels until the deal closed next year.

          The settlement comes as Aviva has been looking to sell businesses to improve its profitability.

          The UK insurer has been holding talks to sell its US business to Guggenheim together with other parties including Apollo. Bankers said a deal may be announced within days.

          OpCapita under pressure over Comet

          Posted on 18 December 2012 by

          Henry Jackson, the former investment banker who runs private investment firm OpCapita, makes a virtue of structuring his deals in a way that means it is extremely unlikely he will lose money for his investors.

          Such an approach is “a bit of a Hippocratic Oath of investing”, he told the Financial Times earlier this year.

            Click to enlarge

            This week he may be regretting those words. OpCapita is coming under pressure – including from the government – as it walks away with £50m from the collapse of electricals chain Comet, which will see nearly 7,000 people lose their jobs, while leaving the government on the hook for £50m.

            The last of Comet’s stores closed on Tuesday, while Vince Cable, the business secretary, has launched an inquiry into the collapse of Comet “to investigate the circumstances surrounding its insolvency”.

            Mr Cable is taking the matter very seriously and committing resources to the inquiry, according to people familiar with the situation. The inquiry could also trigger a more general review of the insolvency regime.

            OpCapita said it would co-operate fully with the inquiry.

            Mr Jackson was head of Deutsche Bank’s consumer and retail practice before embarking on a career in private equity, through Merchant Equity Partners, the predecessor company of OpCapita. He is no stranger to controversy, having sold furniture group MFI before its collapse and after negotiating a £130m dowry on the original purchase.

            His glamorous Canadian wife Stacey is a self-styled pop star, who made headlines last year when she teamed up to record with US rapper Snoop Dogg.

            Mr Jackson’s interest in Comet emerged last year when the electricals chain was put up for sale by Kesa – now known as Darty – which appointed Merrill Lynch to find a buyer for the struggling business.

            OpCapita clinched the business in November 2011, paying a nominal £2 for the chain, which had over 200 stores. Kesa’s financial results, published in June, said: “The Comet Group was sold for an aggregate of £2, subject to certain adjustments relating to cash, inter-company debt, working capital and exceptional costs in Comet on completion.”

            The deal was structured in a complex way, involving several acquisition vehicles.

            According to a report published on Monday by Deloitte, administrator to Comet, Kesa entered into an agreement with Hailey Holdings and Hailey Acquisitions, entities advised by OpCapita. Kesa also agreed to pay £50m to the holding company of Hailey Holdings and Hailey Acquisitions, and retain Comet’s pension liabilities.

            Kesa’s annual accounts show that the £50m was paid into Hailey 2 LP, a shareholder of the purchasers. Hailey 2 LP and Hailey Holdings do not appear to be corporations registered in England and Wales.

            Hailey Acquisitions is registered with Companies House, with Mr Jackson, and Jim Shinehouse, a US restructuring expert, on its board.

            Other investment in Comet came from Greybull Capital, which specialises in acquiring underperforming and troubled companies, as well as Elliott Advisors, a US hedge fund, according to two people familiar with the situation.

            In addition, OpCapita took control of Comet’s warranties business, which is not in administration.

            According to Deloitte’s report, there was £115.4m of inter-company debt. It indicates that a new facility was put in place to repay the inter-company loan. However, this was structured in a way that gave Hailey Acquisitions a charge over Comet’s assets and undertakings.

            According to the report: “A fixed and floating charge was granted to HAL on 3 February 2012 to secure amounts due under the £186.2m Revolving Loan Facility. The security on the Revolving Loan Facility was registered on February 5 2012.”

            In addition, about £9.5m was repaid to Hailey Acquisitions before the administration, according to the report.

            Comet collapsed in November, after it ran out of cash as it built up stock for the crucial Christmas trading period.

            The deal structure ensured that Hailey Acquisitions was a secured creditor, ranking above other creditors.

            During the administration Deloitte has been selling stock, and will be paying about £40m to suppliers.

            This will leave just under £50m for the secured creditor, out of a shortfall of £145.5m.

            In contrast, unsecured creditors, primarily landlords, stand to lose £233m.

            Taxpayers are also set to shoulder a bill of about £50m, with HM Revenue & Customs set to miss out on £26m in taxes owed by the group. The government is also expected to step in to cover about £23m of redundancy costs, amid Comet’s close to 7,000 job losses, as there are insufficient funds to meet these payments.

            Additional reporting by Hannah Kuchler and George Parker


            Group strategy

            Henry Jackson’s OpCapita is a private investment group that looks for big, underperforming businesses, mostly in the retail sector, writes Andrea Felsted.

            According to people familiar with its workings, it puts together groups of investors to back its deals. In the past, investors alongside OpCapita have included Goldman Sachs and Cerberus, although they are not among the investors in Comet.

            After acquiring a business, it aims to hire a fresh management team, incentivised to improve the company’s operations and generate returns.

            It usually drafts in retail heavyweights, such as John Clare, the former chief executive of Dixons, who was installed as chairman of Comet.

            In October 2006, then known as Merchant Equity Partners, it bought MFI, the furniture chain, and negotiated a £130m dowry. MFI was put up for sale in the summer of 2008, and was sold that September. By November MFI had gone into administration.

            But OpCapita has had some investment successes. It bought BUT, the French furniture chain, from Kesa for €550m in March 2008.

            Mr Jackson said in April that the company had achieved average annual sales growth of 7 per cent during the past three years, and made earnings before interest, tax, depreciation and amortisation of more than €80m. He said this was achieved by refreshing products and stores, improving the supply chain and buying in franchises.

            OpCapita also acquired Game Group, the video games retailer, out of administration in March.

            Game insists that it is trading well, and that it is on track to deliver the target of £20m of earnings before interest, tax, depreciation and amortisation by Game’s year-end in July.

            Geithner was told of Libor fears in 2008

            Posted on 18 December 2012 by

            The Federal Reserve Bank of New York was warned as early as mid-2008 that banks may have been misreporting their Libor borrowing rate to aid their own trading positions, much earlier than previously known.

            Tim Geithner, then president of the New York Fed and now US Treasury secretary, was told by a senior colleague in a May 2008 email of her concerns about banks’ deliberate misreporting.

              The email was part of an internal push among some at the New York Fed to press the Bank of England and the British Bankers’ Association to reform the benchmark lending gauge, known as the London Interbank Offered Rate.

              It is the first indication that officials at the New York Fed had grown suspicious that banks may have been misreporting Libor to improve their trading results. Officials already had suspected banks were under-reporting their borrowing costs to mask the state of their financial health.

              The email from Hayley Boesky to Mr Geithner – with three senior colleagues, Meg McConnell, Matthew Raskin and William Dudley, copied in – are among unreported emails seen by the FT that show New York Fed officials linking the incentive for banks to misreport borrowing rates to the bank’s derivatives positions.

              The plea by Ms Boesky, sent a few days before Mr Geithner made Libor reform recommendations to Sir Mervyn King, governor of the BoE, is perhaps the first indication that senior US officials suspected traders may have been influencing banks’ Libor submissions.

              “These individuals report to the head of [the] money markets desk, who often reports to the same person who oversees the derivatives book. They verify the posting with the boss to make sure it suits their derivatives position,” Ms Boesky wrote on May 23 2008.

              The US Congress has launched an inquiry into Libor. In July, the New York Fed made public selected documents related to alleged Libor-rigging by Barclays, which had just reached a $450m settlement with US and UK authorities. Barclays admitted to taking requests from its own derivatives traders and those at other banks into account when making submissions to Libor and Euribor, the euro equivalent, from 2005 to 2007.

              The New York Fed documents played down the possibility of a link between alleged rate manipulation to traders’ derivatives positions. Rather, in those documents New York Fed officials linked Libor misreporting to banks’ fears of appearing financially weak.

              A global investigation spanning multiple continents now threatens as many as 20 banks and inter-broker dealers that may have been involved in manipulating interbank rates influencing hundreds of trillions of dollars’ worth of financial instruments from 2005 to 2009.

              In depth

              Libor scandal

              Analysis BIG PAGE Libor pfeatures

              Regulators across the globe probe alleged manipulation by US and European banks of the London interbank offered rate and other key benchmark lending rates

              Other emails seen by the FT at the New York Fed raised concerns about the possible influence of derivatives traders.

              On May 1 2008, Deborah Leonard, a senior New York Fed official, speculated in an email to colleagues about what she referred to as the “lying premium” theory about Libor submissions. She said there could be an “incentive to lie” by banks if a large number of derivatives used a particular Libor rate as a reference.

              In a June 3 2008 email, Matthew Raskin of the New York Fed noted to colleagues that a pending BBA proposal on Libor best practice stated that rates should be “submitted by members . . . with responsibility for management of a bank’s cash, rather than a bank’s derivatives book”, and that “rates must . . . not [be] set in reference to information given by brokers”.

              Mr Raskin wrote in his email: “While these statements are meant to describe the current state of Libor, they are not consistent with practices described by panel members we’ve spoken with, nor with market perceptions of the process.”

              Other authorities seem to have shared these concerns. In a July 14 2008 email, one Fed official noted that the “principal concern” at the International Monetary Fund “centred on who at the banks provided the Libor quotes – ie making sure the rates come from funding desks as opposed to derivatives traders”.

              A New York Fed spokeswoman said it had determined by “early 2008” that Libor was unreliable, and briefed officials in the US and UK in an effort to address the flawed rate-setting process in London and possible “conflicts of interest” at the banks.

              “The New York Fed developed tough reform proposals including plans for independent audit of Libor submissions to prevent Libor misreporting, whatever the reason, and pressed the UK authorities to adopt them.”

              A Treasury spokeswoman said: “The record confirms that as president of the New York Fed, Secretary Geithner helped to identify the problems with Libor, briefed Treasury and US regulatory agencies on the issue, and pressed for reform by the British Bankers’ Association of the Libor rate-setting process in London, and we welcome the significant international enforcement effort that followed.”

              A representative of Ms Boesky declined to comment.


              Knight Capital at centre of bidding war

              Posted on 18 December 2012 by

              Getco and Virtu, two high-frequency trading firms locked in a bidding war for Knight Capital, have increased their takeover offers for the large US broker as sources said a decision could come later on Tuesday.

              The boosted offers come just weeks after both firms made initial approaches for Knight. People familiar with the bid battle said Getco has lifted the cash portion of its offer to $3.60 a share, up 10 cents from its earlier bid. Meanwhile, Virtu has proposed to pay $3.20 a share in its all-cash bid. Both offers value the company at more than $1bn, excluding debt.

                Getco’s offer amounts to a reverse takeover of Knight, while Virtu intends to take the company private.

                Multiple people said a decision by Knight’s board could be made later Tuesday afternoon or in the coming days. These people also backed away from earlier indications that Knight may hold out for a higher offer from either of the firms. Knight’s board has been engaged in a series of meetings since both firms made their initial offers.

                A successful bid would allow either Getco or Virtu to become one of the biggest electronic trading and market-making companies on Wall Street. Knight is responsible for a tenth of the daily US stock transactions and its market-making business, which accounts for a majority of its revenues, is highly coveted by both suitors.

                A sale of Knight would mark a dramatic conclusion to events that began this summer when a $461.1m trading glitch forced the broker to seek a lifeline to avert capital shortfalls. Knight has yet to publicly disclose a detailed explanation about the event or the results of a third-party review of its product development process in the aftermath of the glitch.

                The company was saved by a $400m bailout from a group of investors, led by the US investment bank Jefferies, but in doing so diluted its existing shareholders by more than 70 per cent.

                Since then, Knight’s future has been in limbo. Most of the company’s customers have returned after a brief exodus following the glitch. Its shares, however, remain two-thirds off from their level before the glitch.

                People familiar with the offers said a close look at Knight’s risk controls were top priorities for both firms.

                Virtu’s offer is backed by financing from Goldman Sachs, Barclays and Cerberus Capital, the private equity group. Getco’s bid is backed by financing commitments from Jefferies.

                Sources said Knight’s 1,500 employees may be at risk due to restructuring efforts following a takeover by either firm.

                General Atlantic, who was part of the Jefferies-led bailout, recused its board seat during the negotiation, as it owns a minority stake in Getco. A successful bid by Getco could provide General Atlantic an exit to realise its investment.

                Virtu’s investors include Silver Lake Partners, the private equity firm.

                Shares in Knight Capital were up 2.5 per cent to $3.34 in late afternoon trading in New York.

                Whirlpool – spin cycle ends

                Posted on 18 December 2012 by

                  It is all coming out in the wash for Whirlpool investors. After a brutal 2011, the US appliance-maker’s shares have returned 119 per cent so far in 2012, fourth-best in the S&P 500. The shares, at $101, are not far off their pre-crisis peaks of 2007. In an industry known for its cyclicality, can the run continue?

                  Whirlpool’s operating performance has been transformed over the past year by rapid widening of profit margins in its home market. Last autumn, the company reported that in North America (a region which accounts for more than half of sales) third-quarter revenues declined slightly and operating margins dropped to 2.6 per cent. In this year’s third quarter, sales grew – albeit at a merely inflationary pace – but margins exploded, passing 9 per cent. The company credited pricing, mix and capacity cuts initiated in 2011. Whirlpool’s second-most important region, Latin America, produced not even half as much profit Asia barely contributed and Europe made a loss.

                  Whirlpool expects more than $7 in adjusted earnings per share for 2012, up from $2 in 2011. The expectations of Wall Street analysts for next year’s EPS have hit $9. The stock trades at 11 times that number, which appears reasonable – if the current level of North American profitability can be sustained. But that would be surprising.

                  To put the current margins in perspective, in the third quarter of the boom year 2007, when North American sales were a fifth higher than today, margins were only slightly more than 5 per cent. Yes, Whirlpool’s Swedish peer Electrolux has also done well in North America, with margins hitting 6.7 per cent in the most recent quarter, up from 1.5 a year before. But the nasty price competition that has long characterised the industry will reassert itself soon enough. Whirlpool’s spin cycle is coming to an end.

                  Email the Lex team in confidence at

                  Greek bond bet pays off for hedge fund

                  Posted on 18 December 2012 by

                  Tourists visit the Parthenon Temple in Athens©EPA

                  One of the world’s most prominent hedge funds is sitting on a $500m profit after making a bet that Greece would not be forced to leave the eurozone, bucking the trend in a difficult year for the industry.

                  Third Point, headed by the billionaire US investor Dan Loeb, tendered the majority of a $1bn position in Greek government bonds, built up only months earlier, as part of a landmark debt buyback deal by Athens on Monday, according to people familiar with the firm.

                    The windfall marks out the New York-based firm as one of the few hedge fund managers to have profited from the eurozone crisis. Standard & Poor’s, the rating agency, raised its assessment of Greece’s sovereign debt by several notches on Tuesday, citing the eurozone’s “strong determination” to keep the country inside the common currency area.

                    Mr Loeb is one of only a handful of hedge fund titans to have made big returns this year. The $2tn hedge fund industry – made famous by investors such as George Soros, who bet against the British pound and “broke the Bank of England” on Black Wednesday in 1992 – has struggled to find its confidence after two years of lacklustre returns.

                    John Paulson, the hedge fund manager who correctly called the US housing crash, has been among those wrongfooted. Mr Paulson has seen his bets on a US economic recovery and a deterioration in the health of Germany’s bonds both unravel. Since 2010 his flagship fund has lost more than 60 per cent of its value.

                    Audacious bets in Greek bonds, which have made a handful of managers huge amounts this year, have been a rare exception to the industry’s record. Third Point is the largest hedge fund holder of Greek bonds, according to traders.

                    The Greek government swapped holdings of its own debt for notes issued by one of the eurozone’s rescue facilities at a value of 34 cents on the euro. Third Point had scooped up holdings of Greek debt earlier this year for just 17 cents on the euro.

                    The firm has also retained a sizeable position in Greek debt because Mr Loeb believes there could still be a long way for the bonds to rally further next year. Analysts at the firm believe the bonds could rally by a further 40 per cent.

                    A spokesperson for Third Point, which manages assets of $10bn, declined to comment on the trade.

                    Third Point has made its investors a 20 per cent return so far this year, compared with 4.9 per cent for the average hedge fund.

                    Mr Loeb, who has earned a fearsome reputation in the investment world for penning acerbic, but acutely observed public letters to those he disagrees with – from recalcitrant corporate board members to President Barack Obama – is one of the US’s most successful hedge fund managers.

                    Mr Loeb, who turned 51 on Tuesday, has recently moved the focus of his firm away from shareholder activism towards making bets across a range of asset classes. The fund has been particularly active in Europe in recent years.

                    Third Point began buying up Greek bonds after profiting from a rally in Portuguese debt at the beginning of the year. Analysts from the fund have kept close tabs on Greek politicians and advisers and have been in ongoing discussions with the Greek government.

                    Why Europe will bounce back in 2013

                    Posted on 18 December 2012 by

                    Watching the crisis in Europe I cannot help but recall the drama that unfolded in Asia in 1997 and 1998. Fear of insolvency seized Bangkok and spread to Jakarta, Seoul and Kuala Lumpur, triggering fiery protests and chasing off investors. The total value of the Thai stock market fell to $30bn – less than Chrysler’s market capitalisation.

                    Today, in equity market terms at least, peripheral Europe is suffering a similar fate. At $42bn, the aggregate capitalisation of the Greek stock market is less than Costco, the US warehouse discount store. The same basic arithmetic applies to Ireland, Spain, Portugal and even Italy, where the stock market now has a total value about the same as Apple’s.

                      The point is not to disparage troubled Europe, quite the opposite. There is value in many of these markets. Since hitting their bottom in 1998 east Asian markets have surged tenfold in dollar terms, marking that year as a huge buying opportunity. The question is whether peripheral Europe is at a similar inflection point?

                      In statistical terms, peripheral European markets have surpassed the lows typical of regional crises since Latin America’s in the 1990s. On average, the maximum decline in the stock market has been 85 per cent in the country where the crisis began and 65 per cent across the region as a whole. Greece’s market, where the eurozone crisis started, had fallen 90 per cent at its lowest point, while the average decline for peripheral Europe was 70 per cent.

                      But the Asian crisis has more than just statistical echoes in today’s eurozone. In order to appear safer places to lend and invest, both regions had fixed exchange rates – Asia in the form of currencies pegged to the dollar and peripheral Europe through the euro. The plan worked almost too well. As interest rates fell locals borrowed to shop, build houses and erect factories. The debt binge drove current accounts – the broadest measure of trade – into deficit, stirring fears about whether these countries could pay their debts. When doubts peaked in one country – Thailand in Asia, Greece in Europe – contagion spread.

                      Compared to the trend in gross domestic product growth in the decade preceding the crisis, Greek GDP is now 28 per cent lower than expected, similar to Thailand which at its low was 30 per cent below trend; Ireland is as hard hit as Indonesia, while Spain, 16 per cent off trend, is 3 percentage points worse off than Malaysia.

                      The big difference is the speed of recovery: Asia had surpassed its pre-crisis output within four years, but Europe has not. Why? Because Asia simply abandoned the dollar peg, and as the region’s currencies crashed, Asian exports became more competitive, sparking a recovery. Asia also had the advantage of recovering in a period of strong global growth. Peripheral Europe does not have any such global tailwinds and cannot just abandon the euro. The region can regain competitiveness only by tolerating a collapse in wages and employment. This process is slow and difficult.

                      The Asian experience shows that one of the strongest signals of recovery in crisis-torn countries is the return of the current account to surplus. That is the point when the economy is generating the income to pay down foreign debts. By early 1998 – when pundits were casting east Asia’s troubles as a threat to the global economy – the end was in sight because current account balances were back in surplus.

                      Peripheral Europe is approaching the same point. Spain, Portugal, Greece and Italy are on track to shift into current account surplus next year. Europe is also making the necessary, painful adjustment in labour costs. Measured from recent peaks, unit labour costs have fallen roughly 7 per cent in Spain, Portugal and Greece. The star, however, is Ireland where a 17 percentage point swing has created the first current account surplus in peripheral Europe at 9 per cent of GDP. Unit labour costs, meanwhile, are down 18 per cent from their peak.

                      In Asia the toughest reformers, namely Indonesia and South Korea, enjoyed the strongest recoveries; there are signs the same will be true in Europe, with Ireland the only peripheral economy on track to post positive GDP growth this year.

                      The recovery in Europe will come. Today, the average ratio of stock market value to GDP worldwide is about 80 per cent; in peripheral Europe, this ratio ranges from 23 per cent in Greece to 38 per cent in Portugal, close to where their Asian counterparts were in 1998. One way to think about the future of Europe is to ponder this question: can Italy be worth no more than Apple?

                      The writer, head of emerging markets and global macro at Morgan Stanley Investment Management, is author of ‘Breakout Nations’