Trading turbulence in banking sector: five hedge fund ideas

Reuters contacted five hedge funds this week about a trading concept they think could profit from the banking sector’s worst volatility since the 2008 financial crisis.

For regulatory reasons, hedge funds can communicate ideas but not trading positions.

1/MAN GLG

EMG.L discretionary fund
End-2022: $26.3 billion
1995 founding.
Key trade: long retail/short SME bank bonds.
Man GLG credit managing director Sriram Reddy preferred retail-focused banks and shorted 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 preferred senior unsecured bank debt, which gave bondholders priority in an insolvency.

He noted that if the economy declines, bearish wagers on banks that lend to small and medium-sized enterprises may be profitable.

AlTi Asset Management

invests in alternative asset managers like hedge funds
$20 billion
1980 founding.
Key trade: Long/short deposit-based bank shares
AlTi’s head of alternatives, Spiros Maliagors, said deposit flows and liquidity matter since the crisis is about confidence. He prefers huge bank shares.

“Currently,’regional bank’ is being used to generalize a large variety of banks,” Maliagors added.

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

Mount Lucas Management

Macroeconomic hedge fund
$1.5 billion
1986 founding
Yield curve steepener
After Silicon Valley Bank’s collapse in March, higher interest rates, bank capital, and regulatory requirements would likely constrain bank lending, said Mount Lucas Management partner David Aspell.

Aspell said short-term bond yields are expected to fall more than longer-term ones if a slowdown cools inflation enough to stop U.S. rate rises.

Two-year Treasury rates are now 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 said.

Asia Genesis Asset Management

Actively managed Asia-focused global macrofund
Near $300 million
2020 relaunch
Short yen
Soon Hock Chua, CIO of Singapore-based Asia Genesis Asset Management, recommends shorting Japan’s yen against the dollar because bank turbulence will likely make the Bank of Japan more cautious and unwilling to raise rates.

The yen has risen 13% from October’s 30-year lows on policy speculation.

Japan’s zero-interest policy will continue. Since Asian central banks have slowed or halted rate hikes, Chua expects the Japanese yen to weaken.

5/Mill Hill Capital

Credit-hedge fund
$350 million
2016 founding.
Short CRE and auto loan companies.
Mill Hill CIO David Meneret advises betting against companies with CRE and car loan exposure using bonds or credit default swaps.

He predicted CRE pressures from insurers, which hold commercial mortgage-backed securities and property.

With property values declining and more borrowers defaulting due to increasing rates and a slowing economy, some U.S. banks are concerned about office CRE.

Since customers’ incomes aren’t rising, Mill Hill said auto lenders with a lot of subprime borrowers may see more defaults.