Hedge funds are currently majorly investing in the shares of big banks. And not because they have downside bets on their mind.

When it comes to financial assets, hedge fund managers have money to invest. For two straight weeks, shares from banks and insurance companies have been the preferred investment choice of professional investors. They are now moving into the sector to an extent not seen in a year, as news agency «Reuters» reported, citing surveys from the American investment bank Goldman Sachs.

Massive Profits Not Just at UBS

Although hedge funds are feared for their downside bets and shorting bank shares, that is currently not the case. Instead, most investors are positioning themselves to buy; to use the sector’s jargon, they are positioning themselves «long» in the financial sector. That means that fund managers are still reckoning with rising share prices.

This is happening despite the fact that bank shares have already undergone a rapid increase since the US banking crisis last March, a crisis that also contributed to the demise of Credit Suisse (CS) in Switzerland. The local market leader UBS has since gained 60 percent in value on the stock exchange; the share prices of Italian competitor Unicredit and Deutsche Bank even climbed by 70 percent.

Ingredients for a Crisis Exist

Since the beginning of the year, the bank indexes in question in Europe and the USA once again posted gains in the high single-digit percentage range. And judging by hedge fund managers in the USA, Europe, and Asia, who are all snatching up financial stocks, the upward trend has not yet lost momentum. Their purchases reveal that despite the uncertain situation regarding interest rates, hedge fund managers are very confident about the sector’s business prospects.

However, one might suspect that the investment professionals have fallen victim to the herd mentality. Because particularly in the USA with the value adjustments for commercial real estate, the ingredients for a renewed banking crisis are at least present. It also seems clear that the financial institutions will hardly be able to repeat their exceptional results from 2023 which saw an interest rate turnaround.

Is There the Risk of a Black Swan?

Seasoned industry analyst Rainer Skierka from the Swiss analysis company Research Partners, recently told finews.asia that he is even reckoning with an unexpected extreme event in the financial markets, a so-called black swan.

Given the current overhang of buy position, hedge managers would probably be caught on the wrong foot in light of such a development.