What do hedge funds make of the eurozone crisis?
Hedge funds normally thrive in volatile times.
Their job description is simple: to make money - for their investors, and for themselves - by spotting mistakes in the financial markets.
If something is priced too high or too low, a fund manager will place a bet that pays off when the market corrects itself.
The ones that get it right are among the highest paid people on the planet.
So when prices are moving violently and irrationally up or down - like they have been doing lately - that should present great investment opportunities.
But that's not how things have gone so far.Feeling philosophical
"The biggest factor is the degree of uncertainty," says Neil Staines, head of trading at ECU, a fund that speculates on exchange rates.
"The markets have begun to question the ability of members to stay within the monetary union."
And that raises all sorts of difficult questions about things that fund managers might normally take for granted.
Where is a safe place to store their cash? Which bank accounts? Which government debts are safe - particularly in light of the decision to impose losses on Greece's lenders?
How much exposure do they have to a given country or bank? If a country leaves the euro, would their investment get converted into a new, worthless currency?
"You need an element of preparedness, irrespective of your core view," says Graham Neilson, chief investment strategist at Cairn Capital.
And that means checking out the health of the banks you do business with, looking more carefully at legal contracts, thinking about whether your insurance will really pay out when needed, and so on.
End Quote David Rubenstein Europe head, BlueMountain Capital
It's not just playing within the game of chess... but talking about what are the rules of chess to begin with”
It's a big headache.
But the crisis also raises philosophical questions, according to David Rubenstein, European head of BlueMountain Capital.
"I think it has brought to the fore in people's minds where the value of money derives from," he says. "What is money? Why do people value it?"
The role of governments and central banks in controlling the value of money - in the US and UK, not just the eurozone - has become a key issue, he says.
"There are so many methods to change the value of things in the private sector," he warns.
Money could be taxed away. Or eroded away by inflation.
Or lost when your bank goes bust - if the government does not rescue it. Or lost when a government itself runs out of cash to repay its enormous debts.
Or it could suddenly be converted into new lira or new pesetas, and devalued.'In it together'
The biggest source of uncertainty facing hedge funds involves political risk - something not normally associated with Western Europe.
Because currently, all markets are moving up and down in tandem - what investors call "correlation" or "risk on/risk off" - depending on general optimism about whether the politicians and the European Central Bank (ECB) will solve the crisis.
And that has forced hedge funds to take a view on how the eurozone crisis may evolve, whether they like it or not.
End Quote Graham Neilson Chief investment strategist, Cairn Capital
It's got a whiff of inevitability about it”
For example, Mr Rubenstein at BlueMountain specialises in looking at the financial health of different companies - not something that usually depends on the outcome of a summit in Brussels.
"At least currently it is driven largely by market perception of political risk. Market perception of how society - including corporations - are all in this together," he says.
So for now, all eyes are on the eurozone politicians, and on Mario Draghi, head of the ECB.
But second-guessing how their negotiations may be resolved - or not - is tough.
"The games are being played at a level that is so much deeper than your typical strategist can handle, where it's not just playing within the game of chess... but talking about what are the rules of chess to begin with," says Mr Rubenstein.
"What does sovereignty mean? Who has the right to tell someone else how to run their country?"'Fiscal noose'
The main plan on the table at eurozone summits is a new set of rules - with semi-automatic fines attached - designed to stop governments borrowing too much in the future.
Mr Bernstein thinks that if a credible plan can be agreed - a big if - then it would be an important first step in restoring investor confidence and stimulating an economic recovery.
But others disagree.
"There's a risk that cutting deficits in a concerted manner crushes growth so much that it doesn't help the issue anyway," says Neil Staines at ECU.
"And it doesn't solve any of the structural issues."
And the big structural issues are the indebtedness and the lack of competitiveness in southern Europe.
End Quote Neil Staines Head of trading, ECU Group
The machine itself is only as strong as the weakest link”
Prices and wages rose too quickly in the south as people borrowed and spent in the last decade, which makes it is very hard for businesses and workers in Greece, Spain or Italy to compete with Germany now.
That is what makes the case for leaving the eurozone so compelling - it would allow southern European governments to devalue their currencies and regain their competitive edge.
"It's got a whiff of inevitability about it," says Graham Neilson at Cairn Capital.
"The eurozone has been on a path towards break-up for more than two years. Nothing has taken it off that path yet, but it could take a long time."
Moreover, he says that while they remain inside the eurozone, southern governments could face a "fiscal noose". If they don't cut their overspending, markets will refuse to lend to them.
But if they do cut spending, the effect on their overindebted and uncompetitive economies may be so devastating as to make the exercise self-defeating.Back-door bailout
Another solution to the crisis might come from the ECB.
Its new head - Mario Draghi - has impressed all three fund managers with his shrewdness.
Whilst maintaining the official line - insisted on by Germany - that the ECB will not bail out governments, last month he unveiled what amounted to a back-door bailout.
The ECB offered unlimited three-year rescue loans to the banks, with the implication that the banks may in turn may keep their respective governments afloat - although it is far from clear that the banks will actually do that.
"In early November there was a very high probability that we were going to get some form of market riot," says Mr Neilson at Cairn.
That risk has been staved off by the ECB's move. But he expects the market reaction to follow a well-trodden path: "There is an initial sugar rush, and then the reality settles back in."
Exactly when the reality settles back in is unclear, although many point to the huge amount of debts that eurozone governments and banks must convince markets to relend to them in the coming three months.
In any case, Mr Neilson thinks that providing cheap loans does not solve the underlying problems either.
Lending more money does not of itself make the old debts go away. Nor does it give southern Europe its competitive edge back.'Weakest link'
So how will the eurozone crisis finally get resolved?
Nobody knows. And that is exactly the problem.
But certain points seem broadly agreed.Continue reading the main story
First is that, if markets lose patience in the politicians and bring things to a head again - for instance by refusing to lend to Italy - the ECB and Germany will probably blink first, and come to Italy's rescue.
The consequences of a disorderly eurozone break-up would be too much to countenance. It could even lead to an outbreak of war, according to one of the fund managers.
So political leaders will do what is necessary to hold off a final resolution for as long as possible.
Secondly, even if the eurozone stays together for the time being, it is facing years of economic malaise as southern Europeans slowly address their debt and competitiveness problems.
And that is likely to entail a much weaker euro, according to currency trader Neil Staines.
It is also why Mr Neilson at Cairn Capital thinks an ultimate break-up may be inevitable.
Thirdly, there is a real risk of a disorderly break-up of the eurozone beyond the control of political leaders.
"Greece is openly discussing the possibility of not being a member of the eurozone any more," says Mr Staines.
"The machine itself is only as strong as the weakest link. If the weakest member gets squeezed, it won't stop there."
Indeed, if other southern European countries were then widely expected to follow Greece in leaving the eurozone and devaluing, their governments would probably find it impossible to borrow, while their banks would likely find their depositors fleeing.
A slow-motion bank run has already hit Greece in anticipation of the country's exit from the euro. And so far there does not seem to be very much that the ECB or anyone else can do to stop it.