Hedge Funds Circling Over the European Wreckage

December 6th, 2011
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Contributed by: The Mad Hedge Fund Trader
Have you ever wanted to spend your summers basking in the sunlight at your mountain top Tuscan villa, surveying the manicured vineyards which produce your own estate bottled wine? Are you drawn by the cachet of claiming George Clooney as a celebrity neighbor on the model strewn shores of Lake Como? How about a luxury apartment that is walking distance from the Vatican?

Hedge fund managers are salivating at the prospect of one of the greatest fire sales in history, as assets of every description are being dumped in anticipation of the hard times now hitting Europe. On the menu will be trillions of dollars of distressed loans hived off by desperately downsizing and deleveraging continental banks. Corporations are expected to dump money losing divisions and subsidiaries in a race to beat the coming recession, which is expected to be severe.

In many respects, these deals of the century represent the second shoe to fall after similar bargains were had in the US during the 2008 crash. Europe’s day of reckoning was postponed by four years, thanks to a recovery in the US, QE1, QE2, and Federal Reserve policies that kept interest rates at century lows.

The complacency in Europe since then has been staggering, with many turning their noses up, claiming it could never happen there. Some are predicting that the balance sheet scrub could take as long as a decade, similar to Japan’s tortuously long repair of its own banking system.

Some hedge funds are taking advantage of the wholesale withdrawal of European banks from the credit markets to beef up their own international lending—at much higher interest rates. The same funds, like Highbridge, similarly locked in enormous spreads in the US when conditions were dire. Several American private equity firms are said to be setting up new European distressed asset funds to peddle to pension funds and high net worth individuals. Those who made similar investments in the US four years ago, made fortunes.

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