Trading turbulence in banking sector: five hedge fund ideas

1 month ago 29

HONG KONG/LONDON, April 28 (Reuters) - Five hedge funds interviewed by Reuters this week each gave details of a trading idea they think could result in a profit from the most significant turmoil to have roiled the banking sector since the 2008 financial crisis.

The hedge funds said they can share ideas, but cannot reveal their trading positions for regulatory reasons.


  • Discretionary fund inside Man Group (EMG.L)
  • Size: $26.3 billion as of end-2022
  • Founded in 1995
  • Key trade: long retail-focused bank bonds/short SME-focused bank bonds

Sriram Reddy, managing director of credit at Man GLG, favoured exposure to retail-focused banks while shorting, taking a position against, small and medium-sized ones.

"For some time we have been expecting and preparing for a slowdown in growth more generally, leading us to favour more retail focused banks with a diversified depositor base and a secured asset base - it means better protections both for investors and the banks during an economic slowdown," he said.

Reddy said he preferred senior unsecured bank debt, that allowed bondholders payment ahead of some other creditors in the event of an insolvency.

Taking bearish positions on banks that lend to smaller and medium sized firms could prove opportunistic if the economy weakens, he added.


  • Invests in alternative asset managers, including hedge funds
  • Size: $20 billion
  • Founded in 1980
  • Key trade: Long/short banks shares based on deposit flows

Spiros Maliagors, AlTi's head of alternatives, said the crisis is about confidence, so deposit flows and liquidity are key. He favours exposure to shares of bigger banks.

"Currently, 'regional bank' is being used to generalize a large variety of banks," Maliagors said.

"I would go long larger, more diversified national banks that have experienced deposit inflows and short local, truly regional banks that have experienced outflows."


  • Macroeconomic hedge fund
  • Size: $1.5 billion
  • Founded in 1986
  • Key trade: Yield curve steepener

Higher interest rates, stiffer bank capital and regulatory requirements after Silicon Valley Bank's collapse in March would likely squeeze bank lending, said David Aspell, a partner at Mount Lucas Management.

A slowdown strong enough to cool inflation would end U.S. rate hikes, meaning yields on short-dated bonds are likely to fall more than those on longer-dated ones, Aspell said.

Two-year Treasury yields have fallen 35 basis points this year to 4.05% .

"If lending drops a lot, activity slows, we will have a slowdown – which is maybe what the Fed wants, but it’s a fine line to tread," he added.


  • Actively managed Asia-focused global macro fund
  • Size: near $300 million
  • Relaunched in 2020
  • Key trade: short yen

Soon Hock Chua, CIO at Singapore-based Asia Genesis Asset Management, favours shorting Japan's yen against the dollar as bank turmoil will likely make the Bank of Japan more cautious and reluctant to raise rates.

Speculation over a potential policy shift has helped lift the yen 13% from October's 30-year lows.

"Japan's zero interest rates policy will remain intact. Trend-wise the Japanese yen should continue to weaken," said Chua, noting that central banks in Asia have slowed or paused rate hikes.


  • Credit hedge fund
  • Size: $350 million
  • Founded in 2016
  • Key trade: Short firms with exposure to commercial real estate (CRE) and auto loans

Mill Hill CIO David Meneret suggests betting against companies with exposure to commercial real estate (CRE) and auto loans through bonds or credit default swaps.

Insurers, which holds commercial mortgage-backed securities and property, will likely feel pressures on CRE, he said.

Some U.S. banks have singled out office CRE as a worry, with property values falling and more borrowers defaulting on loans amid rising rates and a slowing economy.

Mill Hill added that auto lenders with a large exposure to subprime borrowers could face higher defaults as consumers' wages are not keeping up with inflation.

Reuters Graphics

Reporting by Summer Zhen in Hong Kong, Carolina Mandl in New York and Nell Mackenzie in London; Editing by Dhara Ranasinghe and Alexander Smith

Our Standards: The Thomson Reuters Trust Principles.

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