Investor George Soros’s family fund bought about $2 billion of European bonds formerly owned by MF Global Holdings Ltd., the very debt that helped force the securities firm to file for bankruptcy protection Oct. 31, according to people close to the matter
Under the direction of MF Global’s former chief executive, Jon S. Corzine, the firm accumulated $6.3 billion of short-term debt issued by various European nations, mostly from Italy, in a bid to boost trading profits. Over the summer, this debt led to nervousness by investors, regulators and ratings companies, resulting in the firm’s collapse just over a month ago.
Though MF Global sold about $1.5 billion of this European debt in the days leading up to the bankruptcy filing, about $4.8 billion remained. Those leftover bonds were turned over to KPMG LLP, MF Global’s bankruptcy administrator in London.
These positions were offered to a number of big investors immediately after MF Global’s collapse, according to investors who had a chance to buy the bonds. The sales process was run by MF Global’s London clearing house, LCH Clearnet, according to a spokeswoman for KPMG.
Though a number of large investors passed on these bonds, Mr. Soros’s interest was piqued, according to people close to the matter.Earlier this year, his firm moved a chunk of its holdings into safe, liquid investments, giving Mr. Soros the ability to write the approximately $2 billion check for MF Global’s bonds.
The 81-year old investor, together with his investment team at Soros Fund Management, purchased the bonds for below the market price at the time, in a transaction involving JP Morgan Chase & Co., according to these people. Other large investors also bought some of these European bonds once held by MF Global, according to people close to the matter. A spokeswoman for J.P. Morgan declined to comment.
Mr. Soros’s firm still holds the majority of the positions it acquired, the people said.
Soros Fund Management, which manages about $26 billion for Mr. Soros, his family and his charities, may have profited during the subsequent five weeks, these people say, as the market recently has improved for Italian and other European debt.
“While our firm is always in the market, we have a policy of not disclosing details of our positions,” said a spokesman for Mr. Soros.A spokeswoman for KPMG said: “The overwhelming majority of the European sovereign-debt portfolio and related repurchase agreement and reverse-repurchase agreement transactions were liquidated” by LCH before the second week in November.
The Italian-debt purchase by Mr. Soros is significant because it indicates that an investor considered to be one of the world’s savviest has confidence that the country won’t default on its debts, at least by the time these bonds mature in December 2012.
The Soros move, in turn, is something of a wager that a wider collapse of euro-zone finances will be averted. Italy has emerged as the center of the financial storm engulfing Europe because, following bailouts of Greece and other nations, Italy is widely considered too big to save should it run out of funds to service its debts, though some on Wall Street view pessimism surrounding the country’s finances as overdone.Mr. Soros’s credibility as an investor rests in part from a controversial bet he made against the British pound in 1992, which netted more than $1 billion and is considered one of the most successful trades in history.
Scott Bessent, who managed Mr. Soros’s European investments for eight years earlier in his career, returned to Soros Fund Management this year as its chief investment officer. Mr. Bessent is believed to have played a role in the big European debt trade.
The Soros move may pay off. The yield on Italian 10-year debt fell below 6% earlier this week for the first time since October, though it had moved over that mark Thursday in New York.Last week, the debt, whose price rises as its yield falls, was yielding more than 7%—a level seen as unaffordable over the long term for a government that has €1.9 trillion ($2.5 trillion) of debt.
Whether the Soros bet ultimately turns a profit could depend on a meeting of European leaders Thursday and Friday in Brussels, where they will try to hash out measures to avoid a catastrophe.
Unlike MF Global, Soros Fund Management is a private investment firm, providing it with the ability to make gutsier bets and stick with them longer than some others.
After a disappointing second quarter, Mr. Soros decided to hand back $1 billion to outside investors and turned his firm into a “family office,” a move that allows it to avoid a new level of regulatory oversight facing many hedge funds.