Hedge Funds Getting Out of Financials Lately

Hedge funds moved aggressively out of financials in the second quarter.

At the end of the three-month period ending in June, the sector was the fourth most underweight by hedge funds, by 2 percent, according to Mazin Jadallah, CEO of AlphaClone, which tracks top investors. This compares with a 7 percent overweight at the end of the first quarter. “You rarely see this big of a change” from one quarter to the next, insists Jadallah, who draws on the 13f data of about 330 of the largest hedge fund firms representing several trillion dollars.

Another way to determine whether hedge funds moved away from financials is to look at Financial Select Sector SPDR, an exchange-traded fund offered by State Street Global Advisors that seeks to mimic the performance of stocks in the Financial Select Sector index. Jadallah says the funds he tracks held 9 million shares of the ETF at the end of the second quarter compared with 40 million shares at the end of March. The June holdings were the lowest since the first quarter of 2007.

The four hedge funds that liquidated the largest positions in the ETF were Tudor Investment (8.663 million shares), Appaloosa Management (about 4.2 million shares), Alpine Associates (4.1 million) and Moore Capital Management (2.7 million), according to regulatory filings.

In the list of the five most sold stocks in Jadallah’s universe Citigroup was fifth, unloaded by 22 funds.

The biggest sellers in the quarter were York Capital Management, which liquidated its entire 8.8 million or so share position; Viking Global Investment, which unloaded its entire 8.4 million share stake; and Eton Park, which sold all of its roughly 5.5 million shares.

Even so, Citigroup remained the third most popular financial stock among the hedge funds followed by AlphaClone. In fact, Richard Perry’s Perry Corp. was the largest new investor in the second quarter, scooping up 2.47 million shares.

In general, Jadallah attributes the exposure reduction to a recent run-up in the stocks of many financials, leaving a large number fully valued.

One financial stock that seems to be gaining favor among hedge funds of late is AIG. It was the second most popular financial stock in AlphaClone’s universe, owned by 22 funds. It also was one of five new additions to Credit Suisse’s ranking of the 15 most overweight stocks among all hedge funds it tracks.

What’s more, it was the lone financial among this top-15 list as of the end of the second quarter.

As recently as the end of 2011, seven of the 15 most overweighted stocks among hedge funds tracked by Credit Suisse were financials — Simon Property Group, American Express, MasterCard, Equity Residential, Boston Properties, Morgan Stanley and BlackRock.

The biggest new hedge fund investor in AIG at the end of the second quarter was John Griffin’s Blue Ridge Capital, which plunked down nearly $360 million for 10.44 million shares. Other big buyers were Eggerton Capital, Third Point, Viking Global Investors and Ivory Investment Management.