Hedge Funds Gain $7 Billion Betting Against Banks During Turmoil

Hedge funds made more than $7 billion in profits betting against bank stocks during the recent crisis that rocked the sector, the biggest take of its kind since the 2008 financial crisis.

The bumper gains came during a dismal month for banks, with the collapse of Silicon Valley Bank and the emergency sale of Credit Suisse taking a toll on the broader sector. Amid plunging share prices, German Chancellor Olaf Scholz was forced to dismiss fears about the health of Deutsche Bank, and California-based First Republic was bailed out by bigger rivals.

Short sellers — who borrow shares and sell them, hoping to buy them back at a lower price — have made total profits estimated at about $1.3 billion from short positions against SVB, according to with the Ortex data group. Another $848 million in winnings came from bets against First Republic, whose shares fell 89% in March.

Investors gained $684 million by shorting Credit Suisse as a crisis of confidence in the Swiss lender sent its shares down 71%, according to the data. Profits from short positions in the US and European banking sector as a whole totaled $7.2 billion.

“March was the most profitable month for short sellers in the banking industry since the 2008 financial crisis,” said Ortex co-founder Peter Hillerberg. While bank stocks also fell sharply in early 2020, at the start of the coronavirus pandemic, fewer funds were selling short in the sector at the time, limiting gains, he said.

Barry Norris, chief investment officer at Argonaut Capital, said he had a “stellar” month, thanks to bets against banks such as Credit Suisse and First Republic. Its Argonaut Absolute Return fund gained more than 6%.

London-based Marshall Wace, one of the world’s largest hedge fund groups, was also among the bettors, selling 0.7% of Deutsche Bank shares. The funds made net gains of around $40 million from betting against the German lender.

Many hedge funds responded to the growing turmoil by increasing their short positions.

Bets against Credit Suisse, for example, were at just 3.5% of the bank’s outstanding shares in early March, according to S&P Global Market Intelligence, as measured by shares borrowed, but jumped to 14% on March 20. , the day after the sale of Credit Suisse to UBS.

First Republic short interest soared from just 1.3% in early March to 38.5% on the 30th.

Other managers to benefit include Ravi Chopra’s US hedge fund group Azora Capital, which profited from bets against US regional banks, according to a person briefed on its positions. Azora did not respond to a request for comment.

Gains for short sellers on Deutsche, however, were weaker. Although bets against the bank rose rapidly from 1.4% in early March to as high as 6.1% on the 28th, the bank’s shares had already hit rock bottom on the 24th –the date of Scholz’s comments– and they have since regained some ground, eroding the fund’s earnings.

Hedge funds seem to expect new problems to arise in the industry. Short interest on First Republic remains only marginally below the March high of 37.3%, while bets against Deutsche have also fallen only slightly.

Norris of Argonaut highlighted the US Federal Reserve’s liquidity assistance program announced last month. This reduces the risk of weaker US regional banks failing due to lack of liquidity, he said, but the high interest rate charged could lead to “a catastrophic impact on net interest margins, creating a solvency risk”.

“The liquidity crisis is probably over, but the solvency crisis is about to start,” he said.

Translated by Luiz Roberto M. Gonçalves