February 25, 2024

Global hedge funds remain short, ready for further US banking turmoil -JPMorgan

By Nell Mackenzie

LONDON (Reuters) – Global hedge funds were poised to profit from the plunge that occurred in U.S. regional banking stocks last week, according to a JPMorgan prime brokerage note to clients on Saturday that cited data as of Jan. 31.

U.S. regional bank stocks tumbled about 8% on Jan. 31 after New York Community Bancorp reported a surprise earnings miss that saw its stock dive over 40%, signalling broader turmoil in the sector.

Short sellers that targeted shares of a group of U.S. regional banks, including New York Community Bancorp, were up about $1.04 billion in paper profits in the week ending February 2, according to data and analytics company Ortex.

A short position bets that an asset price will fall.

Hedge funds had given up on this trade in December, but the group changed its mind and piled into short positions at the start of the year, JPMorgan said in the note.

Once stock prices declined, JPMorgan saw “saw fairly limited reactions to the sell-off earlier this week,” the note said on Saturday.

More short positions in large-cap banks were added in January, but the majority of hedge funds still held bets that these stocks would rise, said JPMorgan.

Hedge fund trading in the stocks of larger banks was relatively lighter than historically, the note said.

Insurance stocks, also considered part of the financials stock sector, saw short positions added, the note added.

Hedge funds sold financial stocks for the second straight week, and were net sellers for seven out of the last nine weeks, Goldman Sachs said in a separate note on Friday.

The amount of short positions is hovering near a five-year high compared to the number of bets expecting these stock prices to rise, the bank said.

(Reporting by Nell Mackenzie; Editing by Amanda Cooper and Jamie Freed)

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