Financial Sector: Investors Strike While the Iron is Hot
John Paulson, the man synonymous with cashing in on the subprime mortgage crisis as his funds earned triple-digit returns, changed course and is once again, cashing in as the economy attempts to recover from a disastrous 2008. Much publicity has been given to his recent bets on financial stocks, which are providing returns eerily similar to last year’s. Since March’s stock market dip, financial stocks have gained over 137 percent, far exceeding any other sector; Citigroup alone has enjoyed more than a 225 percent jump from its low of under a dollar during March of 2009.
Financial stocks have a tendency to be the first mover in recovering economies, and with the help of government support, strong capital-raising campaigns, and favorable stress-test results, banks, financial institutions, and insurance companies are in a position to reward investors that have taken a chance on the most maligned sector of 2008.
Hedge fund investors are becoming increasingly aware of the opportunities present in funds trading financial stocks. The director of manager selection at a New York-based fund of long/short equity hedge funds strictly looks at sector-specific funds and financials are at the top of his list. The firm is looking to generate a short list of candidates for a potential allocation in the first quarter of 2010. Separately, a Texas-based fund of funds is targeting multiple investments of $5 million to $10 million each over the coming few months, and is seeking directional equity long/short funds with a heavy emphasis on financials. Both investors referenced the significant gains mentioned above and the improving economic outlook as factors in their evaluation process.
Many wonder just how long the financial sector will be able to sustain this dramatic recovery, and if it is simply an anomaly in the bigger picture. However, the actions of some of the world’s most sophisticated investors deserve substantial attention. Furthermore, if the Treasury’s Public-Private Investment Plan works as designed, financial institutions will be able to rid their balance sheets of toxic assets, putting them in even more attractive positions.