London: Nervous hedge fund managers are stress-testing their portfolios and searching for ways to protect themselves against their worst nightmare — a potential break-up of the Eurozone.
With talks on restructuring Greece's debt mountain still deadlocked, and the exit of one or more countries from the euro seen as a small but definite possibility, funds are modelling scenarios ranging from a 50 per cent slump in Eur-opean stocks or a 45 per cent fall in the oil price to a 30 per cent rise in gold.
Managers are also trying to dig out old computer programmes they once used to model the behaviour of currencies such as the drachma or the deutschmark as they prepare for an event for which — even after the 2008 collapse of Lehman Brothers — they effectively have no precedent. Many, having already trimmed risk, are piling into credit default swaps or deeply out-of-the-money options, hoping they pick a counterparty to withstand the shock of a break-up.
"You can't conceive what this event will be like, but it doesn't absolve you of looking at it," said the chief risk officer at one hedge fund firm who asked not to be named.
Funds are also trying to figure out how they might be affected if different asset classes that normally have a low correlation start to fall sharply at the same time.
