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Hedge Funds Have Bigger Appetite For Bank Stocks:50 PM ET 3/4/10 | Dow Jones
By Matthias Rieker

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Hedge funds have taken a renewed interest in bank stocks.

The funds have significantly increased their investments in banks in the last year, particularly buying more stock in the fourth quarter, regulatory filings show. Hedge funds now own 19% of Popular Inc. (BPOP), more than 9% of SunTrust Banks Inc. (STI), 6% of Citigroup Inc. (C) and Zions Bancorp (ZION), and more than 4% of Wells Fargo & Co. (WFC).

"Hedge funds like to buy bargains," said Anton Schutz, a portfolio manager with Mendon Capital Advisors Corp., who bought $3.4 million in Citigroup stock and invested in several regional banks such as New York Community Bancorp Inc. (NYB).

Lori E Calvasina, an analyst with Citigroup Global Markets, wrote in a recent research report: "For large cap financials, average hedge fund ownership stakes are sitting at the highest level we have seen since first quarter 2005, when our data series begins."

It's not just banks; hedge funds also own 20% of E-Trade Financial Corp. (ETFC), with several funds taking new positions in the fourth quarter.

Big bank investors include Paulson & Co., which is now the biggest shareholder of SunTrust, Appaloosa Management, and J.P. Morgan Chase & Co's (JPM) Highbridge Capital Management.

None discussed their holdings or strategy.

According to Standard & Poor's Capital IQ research unit, Appaloosa has 73% of its long equity portfolio invested in U.S. banks, including Citi, compared to just under 20% a year earlier, and Paulson invested 34% in banks compared to 14% a year earlier.

A year ago, hedge funds owned 2.2% of Citi and less than 1% of many banks, including SunTrust and Popular, according to Capital IQ.

While some banks are still too risky for mutual fund portfolio managers, hedge fund inflows reflect a belief that the worst may be over for the banks. In some cases, like Popular, the investments also show bets on which banks will be winners from industry consolidation.

"We see this as a positive," one banker said. "These are very awake investors. They test you all the time...(but) offer a lot of ideas."

But some hedge fund managers warn that despite a recovery from the worst of the financial crisis, their conviction to the bank sector is only lukewarm, and they may ended up with bigger stakes from recent equity offerings than they want. The filings show only hedge fund's long position, and some said they use those stakes to offset short positions.

The massive stock offerings of Citi, Wells Fargo, and Bank of America late last year when the three banks repaid funds to the government from the Troubled Asset Relief Program, offered an attractive entry point, several fund managers said. Institutional ownership of Citi stock doubled after that offering to 40%.

Citi, Popular, and South Financial Group Inc. (TSFG), which is 16% owned by hedge funds, also converted preferred securities classes into common stocks last year, and for some hedge funds such conversion were the entry point into a common stock ownership. At Citi and Popular, meanwhile, several hedge funds have since increased their stake.

Paulson, first reported a big 168 million-share stake in Bank of America, worth $2.2 billion at the time, by June 30--and sold small parts of it every quarter since. Bank of America's shares rose almost 26% since Paulson reported the stake, to $16.41.

Citi's shares fell almost 30%, to $3.44, since Paulson reported a first 300 million-share stake, worth $1.5 billion, on Sept. 30. In December, Citi, which is 27% owned by the Treasury Department, pulled off the largest equity offering in U.S. history, causing the stock to decline.

-By Matthias Rieker, Dow Jones Newswires; 212-416-2471; [e-mail]

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03-04-10 1450ET