Hedge funds earned more than $7bn by betting against bank shares in the current crisis that rocked this sector. This was their largest profit since the 2008 financial crisis.
These record-breaking gains occurred during a difficult month for banks. Credit Suisse’s emergency sale and Silicon Valley Bank’s collapse had a negative impact on the sector. In the midst of plunging share price, Olaf Scholz, German chancellor, was forced to discredit fears about Deutsche Bank’s health and California-based First Republic was saved by larger competitors.
According to Ortex data, short sellers, who borrow stock to sell it and hope to get it back at a higher price, made an estimated $1.3bn in total profits from short positions against SVB. Bets against First Republic, which saw its shares fall 89 percent in March, brought in an additional $848mn.
Shorting Credit Suisse netted investors $684mn. This was due to a crisis of faith in the Swiss lender that sent its shares plummeting 71%, according the data. The total profit from short positions in the US and European banking sectors was $7.2bn.
Peter Hillerberg, co-founder of Ortex, stated that March was the most profitable month for short sellers since the 2008 financial crisis. He said that bank stocks fell sharply in the early 2020 coronavirus pandemic. However, there were fewer short sellers at the time which limited gains.
Barry Norris was chief investment officer at Argonaut capital. He said that he had had a “stellar month” thanks to his bets against First Republic and Credit Suisse. His Argonaut Absolute return fund gained more that 6 percent.
Marshall Wace, a London-based hedge fund group, was also one of those who placed bets and shorted 0.7 percent of Deutsche Bank shares. Bets against Deutsche Bank netted funds gains of around $40mn.
Many hedge funds responded to the turmoil by increasing their short positions.
According to S&P Global Market Intelligence (measured by shares out on loans), bets against Credit Suisse were only 3.5% of outstanding shares at March’s start. However, they had increased to 14% by March 20 when Credit Suisse was bought by UBS.
The short interest in First Republic rocketed, from 1.3 percent at the beginning of March to 38.5% by March 30.
Ravi Chopra’s US-based hedge funds group Azora Capital also benefited, according to someone familiar with their positions. Azora didn’t respond to a request to comment.
Short sellers’ gains on Deutsche, however, were more muted. Although bets against Deutsche were quickly increased from 1.4% at the beginning of March to as high as 6.1% by March 28, shares of the bank had already fallen to their lowest point on March 24, the day after Scholz’s comments. They have since lost some ground, which has eroded funds’ gains.
Hedge funds seem to anticipate further problems in the sector. The March high of 37.3 percent for short interest in First Republic is still only marginally lower than that. However, bets against Deutsche are also down only slightly.
Argonaut’s Norris emphasized the US Federal Reserve’s liquidity assistance program, which was announced last month. He said that this reduced the risk that weaker US regional banks would go bust due to a lack liquidity. However, the high interest rate could have a “catastrophic impact on net interest margins, creating an solvency risk.”
He stated that the liquidity crisis was likely over but that the solvency crisis was about to start.