(Adds hedge fund manager comment in 17th paragraph)
* Top hedge funds ramped up financial holdings in Q2
* Buys of BofA, JPMorgan fueled "worst is over" bets
* Citi left out in Q2; Vinik buys gold
(For other stories in this series on hedge fund activity in
the second quarter, click on [ID:nN01502629])
By Al Yoon
NEW YORK, Sept 2 At least 20 top hedge funds
boosted their positions in financial institutions in the latest
quarter in a sign that Wall Street is ready to bet on more
risky sectors in the hope of longer-term rewards.
The push into financials indicates that fund managers
including Steven Cohen and John Paulson, who are watched
closely as barometers of risk, have shifted from routine merger
arbitrage plays to directional bets that have more potential.
The aggressive switch was given credence by stress tests
conducted by U.S. regulators that underscored the underlying
health and viability of banks -- if they could raise capital.
Low stock prices also made banks a safer play, even if
their profitability was still in question, said James McGlynn,
manager of the Calvert Large Cap Value fund.
"It's a fundamental bet that they won't go to zero, and
that liquidity will come into the system" over time, said
McGlynn, whose fund owns shares in Bank of America(BAC.N) and
JPMorgan (JPM.N). Big banks have "breathing room," he said.
Positions in big financials such as Bank of America and
JPMorgan Chase stood out among the holdings of hedge funds in
the second quarter, according to a Thomson Reuters analysis of
The group of 30 hedge funds in the analysis increased their
exposure to the financial sector by 56 percent to $59.5 billion
in the second quarter compared to the first.
Filings showed at least five of the top funds bought into
Bank of America, led by Paulson's purchase of 168 million
shares. Shumway Capital Partners, run by Tiger Management alum
Chris Shumway, bought 24.1 million shares and Timothy
Barakett's Atticus Capital bought 26.9 million.
(Click on [ID:nN01234966] for details on top plays by hedge
funds in the second quarter)
PROFITS IN QUESTION
The investments in the financial sector speak to improving
outlooks for the economy and expectations that organic growth
Hedge funds are probably looking for companies that are
strong in traditional lending roles instead of former profit
centers such as structured debt, said Nadia Papagiannis, an
analyst at Morningstar in Chicago.
Government-engineered aid over the past year through the
U.S. Treasury's Troubled Asset Relief Program and guarantees on
unsecured debt also created backstops and tailwinds for banks.
A lasting rebound for bank profits is in question, however,
as mortgage delinquencies and foreclosures are rising despite
efforts to slow the trend.
Because nonperforming assets are still growing faster than
bank reserves, profit growth probably will not emerge until
2011, veteran bank analyst Richard Bove said.
Also, estimates for rising stock prices have nearly been
Since lows struck in April, Bank of America's share price
has risen 155 percent to $16.46, close to the $17.61 mean
target estimate of 19 analysts.
JPMorgan shares are up 65 percent to $41.67, less than
$3.00 short of 16 analysts' mean forecast.
"My guess is you won't see a lot of buying, but not a lot
of selling either" by large hedge funds in the current quarter,
said Whitney Tilson, founder of hedge fund T2 Partners LLC, who
has bet on Wells Fargo & Co (WFC.N) over Bank of America. "They
are in for more of a move than we've seen."
In addition, hedge funds like contrarian bets.
Paulson won big with his call against subprime mortgages in
2007, a success that continued with bets against banks
entangled in risky loans.
Profits contributed to a quadrupling of assets under
management in the two years through 2008 to $29 billion.
Hedge funds "have a very good understanding of
(financials), having been involved in them throughout this
cycle," said Scott Buchta, a strategist at Guggenheim Capital
Markets in Chicago.
"Their view is probably that the worst is over for many of
Analysts cautioned that revelations in public filings
probably do not tell the whole story.
For example, the 30 hedge funds included in the analysis
dropped 44.8 million shares of Citigroup Inc (C.N), more than
in any other company last quarter, the filings show.
While fears of fresh losses taint Citigroup, analysts have
noted that some selling came as investors put on strategies to
capitalize on the bank's plans to swap preferred shares into
To do that, investors bought preferred shares and sold
short the common stock.
Paulson bought Citigroup stock in August, the New York Post
reported last week, citing unnamed sources.
SOME BUY GOLD
Other financial shares added by the funds included E*Trade
Financial Corp (ETFC.O) -- dominated by Citadel Investment
Group's 1,000 percent increase -- Regions Financial Corp (RF.N)
and Fifth-Third Bancorp (FITB.O).
"Before, financials all moved together and now the
distinction is who is strong," Calvert's McGlynn said.
The trend of increased hedge fund positions in financials
was matched with gold for funds including Lone Pine Capital
which boosted SPDR Golds by 803,500 shares to 3.45 million.
Vinik Asset Management, run by the former Fidelity Magellan
Fund manager Jeff Vinik, made SPDR Gold shares its biggest
holding with the purchase of 2.1 million shares.
SPDR Golds were also the biggest holding for Paulson.
For a list of the top 30 hedge funds, go to
For a pie chart of the portfolio breakdown by sector, go to
For a graph on the change in market value by sector, go to
(Additional reporting by Joseph Giannone; Editing by Kenneth