Hedge funds have shifted their strategy with regard to U.S. regional banks abandoning their short positions at the close of August and adopting a more bullish stance on the broader U.S. financial sector. This change in sentiment coincided with a notable upswing in bank stock prices
as reported in a note from Goldman Sachs (GS.N).

The prime brokerage desk at Goldman Sachs hedge funds

The prime brokerage desk at Goldman Sachs, which caters to hedge funds
revealed that U.S. financial services entities, encompassing banks, trading firms, and those involved in capital markets
emerged as highly sought-after stocks during the week ending on September 1.

Goldman Sachs noted that the ratio of long trades versus short positions on U.S. regional banks has surged by 26% since hitting a year-low point in mid-July 2023. At that time, traders were predominantly bearish on the sector
opting for short positions, which involve borrowing a stock with the expectation that its price will decline.

The index tracking U.S.

The index tracking U.S. regional bank stocks (.SPLRCBNKS) has staged a recovery of approximately 20% from a two-year low reached in May, triggered by the troubles faced by Silicon Valley Bank (SIVBV.UL), Signature Bank (SBNY.PK), and First Republic (FRCB.PK).

In May, Treasury Secretary Janet Yellen assured that nearly all banks had access to ample liquidity. However, she cautioned that profitability pressures might drive consolidation within the sector.

The Goldman note

The Goldman note further revealed that short positions on larger U.S. banks have also decreased since mid-July
with hedge funds increasingly favoring long positions, marking a 14% uptick in long positions against short bets.

Goldman Sachs noted that a significant portion of the stock buying in U.S. regional banks involved hedge funds repurchasing stock that had been borrowed for the purpose of short bets
a practice known as short covering.

Overall, hedge funds concluded August with net long positions in the broader U.S. financial services sector. This category encompasses a wide range of companies, including major banks, savings and loans institutions
asset management firms, credit services providers, and investment brokerage companies.