Hedge funds stick with bank bets despite rout

Date: Friday, August 12, 2011
Author: Laurence Fletcher and Tommy Wilkes, Reuters

* Managers say bank fundamentals still strong

* Lansdowne, Paulson, Odey funds suffer losses

* Shorts on select French banks up; UK banks steady -data

* Most managers steer clear of shorting banks

LONDON, Aug 11 (Reuters) - Hedge funds are not behind recent falls in French bank stocks, say prime brokers, and have actually held onto their positions in European banks through the losses in the belief the sector is cheap and can ride out the current storm.

Despite another choppy day for French banks Societe Generale , BNP Paribas and Credit Agricole , hedge funds think the bank sector is trading on economic worries rather than fundamentals, say prime brokers, who execute trades and provide leverage for hedge funds.

Well-placed industry executives also report relatively little activity from hedge funds -- many of whom snapped up bank shares near the market low in 2009 -- in French banks relative to UK banks.

"There are some fundamental convictions that people have, and they feel they're going to stick with these convictions through this turbulent time, as the market is more macro-political in its direction than fundamental," said one prime broker who spoke on condition of anonymity.

"There's a widely held belief that there will be, that there needs to be, massive (government) intervention into these markets."

Among funds suffering but sticking to their guns is Lansdowne Partners, one of Europe's biggest hedge fund managers, with around $16 billion in assets, which saw its UK fund fall 4.3 percent last week.

The fund, which was already down 12 percent so far this year to end-July, was hit as Lloyds Bank , in which it has retained a major shareholding, dropped 24 percent last week. The bank is down a further 8.5 percent so far this week.

"Whilst there is volatility, the long-term investment thesis on which the fund is aligned remains unaltered," a person familiar with the fund told Reuters.

"Banks are very binary," said Tim Gascoigne, global head of portfolio management at HSBC Alternative Investments Limited (HAIL). "If they're still around in three years, then they're very good value. Hedge funds are (generally) sitting tight."

"Hedge funds are more long UK banks, as they're easier to value than French banks," he added.

Another manager to have suffered is John Paulson, who has built up big stakes in bank stocks such as Citigroup and Bank of America . His Advantage funds have lost more than 10 percent in a week.

Meanwhile, Crispin Odey, who made millions on Barclays in 2009's rally, held 4.74 percent of his Odey Pan European Fund in Barclays at end-June, Lipper data shows, while also maintaining smaller positions in Deutsche Bank (DBKGn.DE), Lloyds and Credit Suisse .

The fund lost 4.9 percent in July, the Lipper data shows. Odey Asset Management declined to comment on the fund's performance or its European financial holdings.

Equity hedge funds are down a hefty 6.2 percent so far this month, according to Hedge Fund Research's HFRX index, in part due to bank sector falls, but have limited losses by buying portfolio insurance.

FEW SHORTS

And despite reports that hedge fund short-selling has been driving down French and UK banks, very few managers are actually betting on share price falls, prime brokers say.

"It seems the mutual funds are selling rather than hedge funds," said one prime broker who spoke on condition of anonymity. "When you look at our short book, it's been wound down."

The percentage of Societe Generale's shares out on loan -- a strong indicator of short-selling interest -- rose almost 9 percent to 1.34 percent in the week to Aug. 10 as worries over a potential loss of France's triple-A rating grew, according to securities lending analyst Data Explorers.

But this compares with an average 2.8 percent for the volume of stock on loan for the broader European banking sector and represents just 5.28 percent of SocGen's total stock that can be borrowed.

For Credit Agricole, the volume of shares on loan had jumped 9.3 percent to 1.17 percent by the close of trading on Tuesday, before falling on Wednesday to finish slightly higher than a week ago. BNP Paribas saw the volume of its shares out on loan drop slightly by 0.06 percent to 2 percent.

For banks in the UK, where there has been less focus on a possible sovereign credit rating downgrade, funds have shown less interest in shorting their shares.

The percentage of Barclays shares out on loan actually fell to 0.1 percent from 0.38 percent in the week to Aug. 10, the Data Explorers research shows, while for Royal Bank of Scotland it remained flat at 0.02 percent.

"In general across our books we do have funds who are long banks, some who are neutral and very few who are short," said a prime broking executive who asked not to be named.

"They've been there (in UK banks) since the early days of the crisis. Having had the initial crisis, (funds) thought the shares were undervalued."