Earlier quoted context omitted.
But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-point countries, and watching the knock-on effect. Ah : But that demonstrates how terrible CDS is, and how amoral hedge funds are. Actually (IMHO) the fact that Greek CDS was so cheap to buy was just an indication of how little trust people have that politicians re…
But... If I'm a hedge fund, why even own Greek debt plus the insurance? CDSes are generally used to hedge a position. If a hedge fund holds both Greek bonds and CDSes on those bonds, they come out ahead regardless of what happens to Greece.
Only if buying the insurance was cheaper than the carry from owning the bonds. There's no reason that this should be a 'free lunch'. Indeed, CDS, the bonds, and the market for short-selling the bonds, form a no-arbitrage kind of thing : So that no one makes money without risk.