By Thomas W. Johnson
The news out of Europe has been relentlessly grim: multiple
sovereign debt downgrades, declining economic growth, rioting
in the streets over austerity measures, political gridlock.
Traditional long-only investors have largely fled the region
for safer havens, waiting for a return to normal —
whenever that might be — before reinvesting.
Many hedge funds, however, continue to seek opportunities
hidden in the scorched economic landscape. "European markets in
the past year have been obsessed with political brinkmanship
and thus been characterized by volatility and high pairwise
correlations," explains David Tovar, co-founder and head of
research at London-based Skyline Capital Management, a $50
million-plus hedge fund launched in November 2010. "While this
can make it difficult for long-short equity fund managers in
the short term, we believe that high correlations also create a
big medium-term opportunity. At Skyline our approach is to
focus on the facts, avoid consensus positioning and...