Given the sharp drop in financial stocks last year, it should come as no surprise that hedge fund managers continued to dump bank shares during the fourth quarter. There was nearly uniform disgust with U.S. bank stocks like
Bank of America
(BAC - Get Report)
(C - Get Report)
, which had all been big winners for hedge fund managers who bet on their recovery after the financial collapse in late 2008.
Financials as a group were the worst performing sector on the S&P 500 last year, down 18.4%, according to S&P Capital IQ. That performance may have been too much for the likes of John Paulson. His hedge fund finally gave up on several financial holdings, selling completely out of positions in Citigroup, Bank of America,
Others followed in Paulson's footsteps. Among other interesting sales, Bruce Kovner's Caxton Associates, which owned shares of
prior to the collapse, sold completely out of positions in
. Vinik Asset Management cleared its stake of JPMorgan and
In crisis there lies opportunity. Many of those funds that sold bank stocks may have missed out on the 10.2% rally in the fourth quarter and the 11.1% rally in the sector this year. Some smart hedge fund managers were buyers of financial stocks last quarter during the carnage, which increased their reported portfolio's sector weighting.
Third Point's Daniel Loeb
made new buys of
. While Brevan Howard slashed its position in
, the hedge fund initiated a stake in Bank of America. Kyle Bass bought up 10 million shares of
during the quarters.
These financial buyers may not be completely crazy. If there's one reason for optimism, next year's earnings growth may be it. According to FactSet Research, financials should see earnings growth of 22.3% in 2012, the highest based on analysts' estimates of all sectors. It remains to be seen if the European debt crisis and the exposure to those troubled countries derails those rosy forecasts.
>>To see these stocks in action, visit the
Financial Stocks Bought and Sold by Hedge Funds
portfolio on Stockpickr.