Hedge funds make $7bn from betting against banks during turmoil

Hedge funds made more than $7bn in profits by betting against bank shares during the recent crisis that rocked the sector, their biggest such haul since the 2008 financial crisis.

The bumper gains came during a bleak month for banks, with the collapse of Silicon Valley Bank and the emergency sale of Credit Suisse affecting the wider 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 larger rivals.

Short sellers — who borrow stock and sell it, hoping to buy it back at a lower price — made estimated total profits of around $1.3bn from short positions taken against SVB, according to data firm Ortex. A further $848mn in gains came from bets against First Republic, whose shares fell 89 per cent in March.

Investors made $684mn from shorting Credit Suisse, as a crisis of confidence in the Swiss lender sent its shares tumbling 71 per cent, according to the data. Profits from short positions across the US and European banking sector as a whole totalled $7.2bn.

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

Barry Norris, chief investment officer at Argonaut Capital, said he had enjoyed a “stellar” month, thanks to bets against banks including Credit Suisse and First Republic. His Argonaut Absolute Return fund gained more than 6 per cent.

The liquidity crisis is probably over, but the solvency crisis is about to begin.

London-based Marshall Wace, one of the world’s biggest hedge fund firms, was also among those placing bets, shorting 0.7 per cent of Deutsche Bank’s shares. Funds netted gains of around $40mn from bets against the German lender.

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

Bets against Credit Suisse, for instance, were running at just 3.5 per cent of the bank’s outstanding shares at the start of March, according to S&P Global Market Intelligence, as measured by shares out on loan, but had jumped to 14 per cent by March 20, the day after Credit Suisse was sold to UBS.

Short interest in First Republic rocketed from just 1.3 per cent at the start of the month to 38.5 per cent by March 30.

Other managers who benefited include Ravi Chopra’s US-based hedge fund firm Azora Capital, which profited from bets against US regional banks, according to a person familiar with its positions. Azora did not respond to a request for comment.

Short sellers’ gains on Deutsche Bank, however, were more muted. While bets against the bank were quickly raised from 1.4 per cent at the start of the month to as much as 6.1 per cent by March 28, the bank’s shares had already bottomed on March 24 — the day of Scholz’s comments — and have since recovered some ground, eroding funds’ gains.

Hedge funds appear to be expecting further problems to emerge in the sector. Short interest in First Republic remains only marginally below the March high at 37.3 per cent, while bets against Deutsche have also fallen only slightly.

Argonaut’s Norris highlighted the US Federal Reserve’s liquidity assistance programme announced last month. This, he said, reduces the risk of weaker US regional banks going bust owing to a lack of liquidity, but the high rate of interest being 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 begin,” he said.

laurence.fletcher@ft.com