Hedge Funds are recouping gains from bearish positions on falling bank stock

According to a statement from Goldman Sachs emailed to clients late on Sunday, hedge funds ended the previous week well-positioned to seize winning returns from negative wagers on falling bank stock.

For nine weeks in a row, they sold banks and stocks with financial themes, but instead of just closing off long positions, the funds also added bearish wagers, according to the note obtained by Reuters.

According to the note, Goldman Sachs' prime brokerage division, which provides services to hedge funds, the financial industry was the one that was most net sold globally.

Monday saw a decline in global shares, and European stocks were expected to have their worst day in over three months (.STOXX). Even when U.S. authorities intervened to contain the consequences from Silicon Valley Bank's failure, banking shares continued to decline (SVB).

Hedge funds not only reduced their optimistic bets on stocks with a bank theme, but they also increased their short bets as of Friday, the Goldman note stated.

Also, the ratio of bullish to bearish positions has reached a low that predates by more than eight years.

The net exposure to U.S. banks is at its lowest point since September 2021 as many speculators completely sold their holdings in bank equities, according to the paper.

According to Mark Dowding, chief investment officer at BlueBay Asset Management, the large movements in bank stocks on Monday could be attributed to hedge funds that appeared to be short shorter-dated bank bonds.

According to him, "we have witnessed an incident in the U.S. that moved from a single A-rated bank having bonds worth virtually nothing in a matter of time," so against that background, that has an impact that is felt more widely.

Shares of regional and smaller U.S. banks have fallen due to worries about a wider banking sector meltdown.

First Republic Bank (FRC.N) fell more than 60% earlier on Monday, while Western Alliance Bancorp (WAL.N) lost 11.5%.

In US premarket trade, larger banks were pulled down. As of 09:45 GMT, shares of Wells Fargo (WFC.N), Citi (C.UL), and Bank of America (BAC.N) were all down significantly.

Ref: (2023. March 13) Reuters.