By Nell Mackenzie
LONDON (Reuters) – Hedge funds abandoned their short positions on US regional banks in late August and turned bullish on the broader US financial sector, a Goldman Sachs note shows, just as bank stock prices began to rise.
U.S. financial services firms, including banks, trading firms and companies operating in the capital markets, were among the most sought-after stocks in the week ending Sept. 1, according to the note from Goldman’s prime brokerage desk, which serves hedge funds.
The ratio of long trades to short positions on US regional banks is up 26% since the year-to-date low in mid-July 2023, when traders mostly shorted the industry, the bank said. In a short or bearish bet, a stock is borrowed to sell in the hope that its price will fall.
An index of US regional bank stocks has recovered about 20% of its value from a two-year low in May following the bankruptcy of Silicon Valley Bank, Signature Bank and First Republic.
Treasury Secretary Janet Yellen said in May that nearly all banks had access to adequate liquidity, but warned that earnings pressures could lead to industry consolidation.
Short positions on larger US banks have also fallen since mid-July, with hedge fund long positions up about 14% over short positions, the Goldman Note showed.
The bulk of stock purchases in U.S. regional banks were hedge funds buying back stocks borrowed for the purpose of short betting, or so-called short hedging, Goldman said.
Within the broader U.S. financials sector, hedge funds ended August with net long positions, the note said.
The sector often includes companies such as larger banks, savings and credit institutions, asset managers, credit services and investment brokers.
(Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and David Holmes)