Hedge funds stand to lap up bearish profits from bank stock rout

Hedge funds ended last week positioned to scoop up winning profits from bearish positions on bank stock falls, according to a note by Goldman Sachs sent to clients late on Sunday.

They sold financially themed shares and banks for nine straight weeks but rather than only exiting long positions, funds added bearish bets, according to the note seen by Reuters.

Financials was the most net sold sector globally for Goldman Sachs’s prime brokerage division, the part of the bank which serves hedge funds, the note said.

World equities fell on Monday and European stocks were set for their worst day in almost three months (.STOXX). Banking shares slid further even after US authorities stepped in to cap the fallout from the collapse of Silicon Valley Bank (SVB).

Hedge funds not only exited bullish positions on bank-themed equities, they added short positions as of Friday, betting bank shares would fall, the Goldman note said.

The ratio of bullish to bearish positions has fallen to more than an eight-year low, it added.

Many speculators exited bank stocks entirely and the net exposure to US banks sits at its lowest level since September 2021, the note said.

BlueBay Asset Management chief investment officer Mark Dowding said big moves in banks stocks on Monday could be explained by hedge funds appearing to have been positioned short at shorter-dated bank bonds.

“We have seen an event in the US that went from a single A rated bank having bonds worth next to nothing in a short space of time, so against that backdrop, that has an effect that is translated on a more widespread basis,” he said.

Regional and smaller US bank shares have slid on concerns of a broader fallout in the banking sector.

Earlier on Monday, First Republic Bank (FRC.N) plunged over 60 per cent while Western Alliance Bancorp (WAL.N) lost 11.5 per cent on Monday.

Larger banks were dragged lower in US premarket trading. Wells Fargo (WFC.N) shares fell 2.4 per cent, Citi (C.UL) was down 1.9 per cent and Bank of America (BAC.N) lost 4.2 per cent as of 0945 GMT.