Hedge funds regain confidence after the acquisition of Credit Suisse by UBS

Hedge fund managers and large investors are yet to be spooked by the current conditions in the global financial sector. The past two weeks have seen two of the largest banks in the United States collapsing and banking giant Credit Suisse being acquired by UBS.

Large investors not spooked by the turmoil in the banking sector

One of the factors that could be attributed to the increased confidence of large investors is the acquisition deal for Credit Suisse by UBS. The deal has shown signs of stability in the banking system, but there are concerns about the monetary tightening policy.

Despite the sign of relief caused by this acquisition deal, some people are concerned that the $3.2 billion that UBS will pay for Credit Suisse is significantly lower than the $9.5 billion the lender was valued at last Friday. Some investors are concerned that the markets would react to the low offer.

According to the chief investment officer of Third Point LLC, Daniel Loeb, the news of Credit Suisse’s acquisition by UBS was a positive thing for the financial sector as it seeks to preserve the capital structure. However, there are concerns that the deal will wipe out billions of dollars worth of Credit Suisse bonds.

Concerns over the stability of small banks

There are also concerns about how investors will react to the uncertainty around smaller US banks such as First Republic. On Friday, First Republic’s stock dropped by 33%, barely a day after some of the largest banks in the US, such as JPMorgan Chase and Goldman Sachs, organized a $30 billion rescue deal for First Republic Bank.

According to fund managers, betting on a further drop in First Republic Bank’s shares was risky because of the rescue package organized by banking giants in the US. It is believed that retail investors could come together to support banks such as First Republic, which are being seen as solid businesses.

The short interest for investors in First Republic came in at $190 million, worth around 3% of the bank’s float. Data released on Friday by the S3 Partners research company said short sellers reported mark-to-market profits of $537 million on the trade made during the year. On the other hand, $62 million in profits were reported on Friday alone.

Some investors anticipate that federal regulators will impose new rules targeting regional banks after tightening the lending standards and forcing these banks to secure additional capital. With increased regulatory pressure, there are concerns that purchasing stock on these banks after a steep decline proves will be tough as lending activity slumps.

Investor Ricky Sandler has also estimated that there could be interest in First Republic Bank by investment banks that attend to wealthy clients. The KBW Bank Index, a proxy used by banks, dropped by 11.12% last week, indicating more turmoil in the market.

Some investors, such as large mutual fund groups have said that prospects for banking institutions have worsened in recent months because of the economic outlook. A senior executive at the company also said the country would plunge into a recession last year amid a drop in banking exposure.