SAN FRANCISCO (MarketWatch) -- Moore Capital, a leading global macro hedge fund firm run by Louis Moore Bacon, warned of a "potential breakdown" of the European Monetary Union and criticized plans to bail out Greece, according to a recent investor letter obtained by MarketWatch on Wednesday.
"Perhaps the most interesting area for the foreseeable future is in the potential breakdown of the European Monetary Union," Bacon wrote in the letter, dated April 16.
"Instead of punishing the Greeks for their free-rider and fraudulent gaming of the Maastricht rules -- either by ejecting Greece from the Union to propel them to reform and come back at a competitive exchange rate or by forcing them to restructure their debt within the confines of monetary union, either of which would have eventually strengthened and solidified the euro -- the European leaders have decided to reward the prodigal Greeks with a bailout, socializing their ills and taxing once again the prodigious northern European workers," Bacon added.
The bailout could have "disastrous consequences" for the European Union and Europe, he warned.
Sovereign wealth funds have bought trillions of euros to diversify away from U.S. dollars. That's supported the euro and allowed European investors to "flee their debauched currency," Bacon wrote.
When sovereign wealth funds "finally realize what they own, they may stand aside," he warned. "The euro will find a new level while these large funds instead seek currencies in the emerging markets where solvency is not such an issue."
European leaders criticized hedge funds for betting against Greece government debt earlier this year as they worked on a plan to support the country. In February, Moore and other hedge funds such as Brevan Howard, distanced themselves from the trade. Moore said at the time that it wasn't betting against Greece government debt.
"There were many recent newspaper reports citing that Moore Capital and others were shorting the Greek bond market," Bacon wrote in an annual letter to investors dated Feb. 19. See story about the 'PIGS' trade.
"We are positioned with a net long duration exposure to Greek bonds which explains a drag on performance month to date," he added at the time. "We are expecting the European authorities to move beyond uninformed blame-casting and begin bailing out Greece."
Still, Bacon noted in February that tensions between better-performing economies in the Euro zone and "laggards" such as Greece may signify larger issues in the region.
Hedge fund legislation
In his April 16 letter, Bacon criticized European moves to regulate hedge funds heavily, linking the effort to the Greek crisis.
"European financial authorities see hedge funds particularly as a threat to their ability to contain prices, information and confidence in their increasingly risky sovereign debt markets," he wrote. "Witness their demonization of hedge funds in the market revolt after the Greeks were found to be lying about their deficit data."
"Instead of listening to the market's warnings (and if anything, the market players had been much too relaxed about sovereign funding risks), the European authorities would prefer to adopt a stance of 'First Kill All the Canaries in the Mineshafts,' Bacon added.
Proposed European legislation on hedge funds will probably be decided soon and could represent a "seismic shift" for the alternative investment industry in the region, he said.
Bacon also said it's looking to attract longer-term investors after its performance was restrained by redemptions during the financial crisis.
Moore Capital has a new marketing team, which "has had very good success in attracting what we hope is sticky capital from more institutional investors," he wrote in the letter.
Moore's main hedge fund has generated annual returns of more than 20% over two decades. It suffered only small losses in 2008 and returned more than 22% last year.
Despite that, the firm saw more than $5 billion redeem from its main hedge fund platform during the recent financial crisis, Bacon noted in the letter.