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10 Financial Stocks Hedge Funds Are Buying

Updated with additional information on funds selling Bank of America.

NEW YORK (TheStreet) -- Hedge funds pared their exposure to the financial sector in the second quarter as the sovereign debt crisis in Europe deepened and the U.S. economy showed signs of stalling.

An examination of the regulatory filings with the Securities and Exchange Commission shows that smart money dumped their exposure to large money-center banks including JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC).

Citigroup (C) remained among the top holdings of hedge funds, according to filings data compiled by Bloomberg, and continued to see selective buying.

The big hedge fund names seemed divided in their outlook for Citigroup and Wells Fargo. David Tepper of Appaloosa Management , John Paulson of Paulson & Co and George Soros all cut back their exposure to Citigroup. Meanwhile Bill Ackman added to his stake in Citigroup, while Lee Ainslee's Maverick Capital took a fresh stake in the company.

John Paulson (Paulson & Co.)

While Soros and Maverick Capital sold Wells Fargo, Paulson upped his stake by 65%. The bank also continues to get strong support from billionaire investor Warren Buffett's Berkshire Hathaway (BRK.A), who increased his holdings during the quarter.

However, most seemed to be in agreement that Bank of America was not worth the risk. David Tepper slashed his holding in the stock by 42%. John Paulson also gave the stock the ax.

Analysts continue to downgrade their estimates for the stock. The bank faces a particularly difficult battle with New York Attorney General Eric Schneiderman who is threatening to intervene in its $8.5 billion settlement with 22 institutional investors over mortgage-backed securities.

Even as hedge funds cut their overall exposure to banks, some financials continued to garner their interest. Significantly, Canadian banks seem to dominate the list, no doubt due to their sound balance sheets and healthy profitability ratios.

Credit card issuers, insurance companies and asset managers also made the list, suggesting that investors have perhaps given up on pure-play banks that are exposed to residential real estate.

Of course, data from these filings are as of June 30, which means their positions could have changed since then, especially as valuations of bank stocks have further dropped.

Here is a list of ten financial companies that hedge funds bought during the second quarter, according to Bloomberg data.

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