US banks out of favor with European hedge funds, Goldman tells clients

By Carolina Mandl

NEW YORK (Reuters) – European hedge funds have reduced their exposure to U.S. banks at a fast pace since the beginning of the year, while roughly keeping their positioning in European banks, Goldman Sachs said in a recent report sent to clients.

Overall, shares in European banks are outperforming U.S. peers as they did not face a deposit flight as happened in the U.S. The STOXX Europe 600 Banks index is up roughly 8% this year, while the Dow Jones US Banks index is down 9%.

“In Europe, hedge funds have rotated out of banks and insurance into financial services in the past couple of months, but still positioning in European banks remains stronger than in U.S. banks,” Goldman Sachs wrote in the report obtained by Reuters.

The Wall Street bank runs one of the world’s biggest prime brokerages, which provide lending and trading services to investors and are able to see how large hedge funds and asset managers are moving.

Goldman Sachs did not immediately comment on the report.

The data show that European investors are more bullish about banks on their own continent, while they have a more neutral approach to U.S. banks.

The Wall Street bank uses the so-called long/short ratio to gauge investors’ sentiment, dividing long positions by short positions. The long/short ratio for U.S. banks was close to 100% at the end of June, meaning hedge funds are on average long one bank stock while short one bank stock.

For European banks, however, the ratio was around 190%.

The gap between European hedge funds’ positioning in European and U.S. banks has widened mainly after the banking crisis in which U.S.-based bank Silicon Valley Bank and two other lenders failed earlier this year.

European banks did not escape unscathed. UBS acquired its rival Credit Suisse in a rescue orchestrated by the Swiss government, but it was not seen as a systemic crisis.

The U.S. banking crisis has spooked some investors across regions. Bridgewater Associates, one of the world’s largest hedge funds, sold U.S. bank stocks in the first quarter amid the collapse of some regional lenders. It exited positions in five U.S. banking giants: JPMorgan (NYSE:) & Co, Bank of America Corp (NYSE:), Wells Fargo (NYSE:) & Co, Goldman Sachs Group Inc (NYSE:) and Morgan Stanley (NYSE:), regulatory filings showed in May.