Are Hedge Fund Short Sellers Hunting And Targeting Specific Bank Stocks?

After the failure of SVB Financial Group SIVB, Signature Bank SBNY and Silvergate Capital Corp SI, the banking industry seemingly stabilized on Monday, with most bank stocks rallying in early trading.

Hedge Funds To Blame? One notably strong name on Monday has been Deutsche Bank AG DB, which initially experienced heavy selling pressure on Friday morning.

On Monday, Quincy Krosby, chief global strategist for LPL Financial, said hedge fund short sellers may be responsible for targeting Deutsche Bank and several other struggling bank stocks.
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"Hedge funds, known to hunt for banks that could have pockets of weakness and/or are over-leveraged, are suspected to have targeted DB by attacking the bank's bonds and shorting the underlying stock," Krosby said.

"This was a prevailing practice that intensified the damage during the 2008-2009 financial crisis, and there are questions as to whether this helped to provoke the recent panic within the banking sector."

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What's Next? The good news for bank stock investors is that First Citizens BancShares Inc FCNCA rallied more than 52% on Monday after the bank acquired most of Silicon Valley Bank's deposits overnight.

That news also triggered a rally in ailing First Republic Bank FRB, which gained more than 10% on the day.

Looking ahead, Krosby said the next major stock market catalyst could come Friday when the Labor Department releases its personal consumption expenditures price index inflation reading for February. He said a lower-than-expected core PCE gain could give the Federal Reserve a green light to put its rate hikes on pause.

Benzinga's Take: Hedge funds may not have instigated the recent wave of bank stock volatility, but they might have made it worse by piling into the weakest stocks by opening large short positions. One common way for hedge funds to mitigate risk is via pair trades, which often includes simultaneously going short the highest-risk stocks and long the lowest-risk names.

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