Contrary to all expectations, investment funds that bet on fluctuations in interest rates and increases in the cost of public borrowing which have been accused of exacerbating the euro crisis did not post any gains in May. According to official figures from the American Hedge Fund Research bureau, funds who employ teams of experts in this kind of market position as part of a global macro strategy posted an average loss of 0.92% in the course of a month of turmoil for the single currency. And this state of affairs is also reflected in figures for their performance since the beginning of the year, which indicate an overall loss of 1% to customers, while alternative funds made a much better job of holding their own in a difficult the market, losing only 0.3%. "It is not a disaster, macro funds routinely post performance fluctuations on this level," explains Eric Bissonnier, one of the managers of the Nyon based EIM Group, which specialises in the selection of hedge funds.

Although this may be the case, the tone of comments in the industry has certainly changed. As recently as mid-April, Louis Bacon – the legendary leader of the Moore Capital global macro fund – informed his customers that "the most interesting area for the foreseeable future" would likely be "the potential breakdown of the European Monetary Union." However, according to an investor who wishes to remain unnamed Moore Capital's leading fund lost almost 8% in the first weeks of May. Bloomberg has reported that during the same period, the main fund operated by Brevan Howard – the largest European hedge fund – earned nothing, while the Advantage funds under John Paulson, who amassed a huge fortune in the subprime crisis, lost close to 7%. All of this appears to be evidence that EU member states have won the "battle between the politicians and the markets" mentioned by Angela Merkel in a speech to the German parliament on 6 May.

Worst month of May since 1940

However, the reality is somewhat more complex. As Laurent Chevallier, a sector specialist for Eurofin Capital in Geneva, explains, many of the funds labelled as "speculative" succeeded "in earning a lot of money in March and April, which they used to increase their positions in May. At the same time, what began as a plan to go short on Greece, evolved to become a strategy of going short on the euro and European markets with a long position in gold." However, these positions were undermined by the 750 billion bailout announced by the European Union on 9 May, and by the subsequent about-turn, which saw the European Central Bank (ECB) change its policy to become the buyer of last resort for sovereign bonds that had come under relentless attack from short selling and trading in complex products known as credit default swaps (CDS).

According to experts, the mobilisation of European governments and the ECB in response to what were perceived as speculative attacks against the euro is not sufficient to account for all of the losses posted by global macro funds. In reality, funds speculating on Greek default or the collapse of the eurozone, along with others who were not involved in any trades of this kind, were forced to contend with the much more prosaic though nonetheless crucial problem of exceptionally bad conditions on European markets, as well as on Wall Street, which recorded its worst month of May since 1940.

Vision of Europe remains unchanged

The general confusion and adverse conditions that applied in May should lead us to relativise the influence of hedge funds in the financial crisis in Europe. However, we should also bear in mind that at the same time, the less explicit threat of increased regulation by European authorities led some of the higher profile hedge funds to exercise greater caution.

However, the battle is not over yet, because the downturn for "speculative" funds may prove to be short-lived. In recent weeks they have abandoned their positions on sovereign debt to speculate on the more anonymous reaches of the foreign exchange market — and their vision of the situation in Europe remains largely unchanged. "Alternative asset managers still take a negative view, and speculating on the fall of the euro is a simple way of expressing that," explains HDF International director Alexandre Poisson. In short, European leaders will need more than one bad month of May if they are to succeed in eradicating the negative sentiment which still holds sway.