Hedge Funds Increase Bets Against Euro to Record High

PAULSON & COHedge funds may have been hit hard by the market volatility triggered by the European sovereign debt crisis, with hedge funds going out of business at the fastest pace in more than a year during the third quarter, but there is no love lost.

"Hedge funds increased their bets against the euro to a record level in the last week of 2011, increasing pressure on the embattled European common currency as it enters the most testing year of its history," according to the Financial Times. "Many hedge funds lost money betting against the euro for much of last year, as the currency remained unexpectedly strong despite the continent’s worsening financial crisis." In fact, the average hedge fund lost 4.4% through November in 2011, putting it on course to be the second-worst year for the hedge fund industry, and some popular hedge fund managers, like John Paulson, are reporting massive losses.

However, after the euro suffered a weak November and December, it ended the year as the worst performing major currency – coming in at a 10-year low to the yen and a one-year low to the U.S. dollar. "This triggered a renewed surge in bets against the currency in the week ending December 27, according to data from the Commodity Futures Trading Commission in the US, released late in the US on Friday." The Financial Times reports, "The number of short positions in the euro – where investors benefit from a decline in prices – outweighed long positions by a record 127,900 contracts by December 27, up from 113,700 contracts the previous week. The value of the contracts is not disclosed."

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