Hedge funds retreat from Euro for fear of regulation

As the Euro hit a new low against the dollar yesterday, Europe's largest hedge fund said it was retreating from speculating against the troubled currency for fear of a new wave of government regulation in the event of a crash.

Hedge fund Brevan Howard said in a note to investors that the trade in Eurozone government bonds is "exposed to a regulatory squeeze as occurred on short positions on financial stocks in 2008", referring to the ban on short selling of financial stocks, which was imposed to allow banks to recover from the credit crunch. The note said the fund has closed out all of its positions on European sovereign debt.

The Financial Times also reports that Moore Capital and Paulson & Co have abandoned their short positions on Greek government debt, the country whose troubles (pictured) sparked the Euro's decline in the first place.

Hedge-funders have good reason to worry. The US Justice Department yesterday launched an investigation into whether hedge funds colluded in betting against the Euro. The Wall Street Journal said Justice has asked several hedge funds, including Paulson & Co, to retain all emails and documents relating to the currency.

And here in Britain, Lord Turner, chairman of the Financial Services Authority, told the Treasury Select Committee yesterday that regulators should consider banning investments made with the sole purpose of profiting from a country's sovereign debt. At the same time he said such investments were far from the only factor in Greece's debt crisis.

Despite the risk of regulation, not all hedge funds are playing it safe. The FT reports that yesterday short positions against the Euro were up sharply as the Euro fell to 10-month low against the dollar, before rising slightly today as the Greek government announced a new set of austerity measures.

It seems a few bad eggs in the hedge fund market can be guaranteed to ensure governments will impose some kind of regulation. ·