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Hedge funds stand to profit from the bank stock sell-off

According to a report delivered to clients late on Sunday by Goldman Sachs, hedge funds ended the previous week positioned to profit from negative wagers on bank stock declines.

According to a note reviewed by Reuters, they sold stocks and banks with a financial theme for nine consecutive weeks, but instead of only abandoning long positions, they also added bearish wagers.

Financials was the largest net sold sector internationally for the prime brokerage branch of Goldman Sachs, which serves hedge funds, according to the memo.

On Monday, global markets declined and European stocks were poised for their worst day in nearly three months (.STOXX). Even after US regulators intervened to limit the consequences from the failure of Silicon Valley Bank, banking shares declined further (SVB).

Not only did hedge funds dump bullish bets on bank-related equities as of Friday, but they also acquired short positions in the expectation that bank shares would decline, according to a Goldman report.

In addition, the ratio of bullish to bearish holdings has reached its lowest level in more than eight years.

The net exposure to US banks is at its lowest level since September 2021, according to the report, as many speculators abandoned bank stocks outright.

The chief investment officer of BlueBay Asset Management, Mark Dowding, stated on Monday that large price fluctuations in bank stocks could be explained by hedge funds' short positions in bank bonds with shorter maturities.

“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 stocks have declined due to fears of a broader banking sector decline.

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

Bigger banks were driven lower in US premarket trade. As of 09:45 GMT, Wells Fargo (WFC.N) shares were down 2.4%, Citi (C.UL) shares were down 1.9%, and Bank of America (BAC.N) shares were down 4.2%.


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