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), Citigroup (C - Get Report) and JPMorgan Chase (JPM), 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, BlackRock (BLK) and others.
Others followed in Paulson's footsteps. Among other interesting sales, Bruce Kovner's Caxton Associates, which owned shares of MF Global prior to the collapse, sold completely out of positions in Wells Fargo (WFC) and Morgan Stanley (MS). Vinik Asset Management cleared its stake of JPMorgan and American Express (AXP).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. Most notably, Third Point's Daniel Loeb made new buys of Goldman Sachs (GS), Genworth Financial (GNW) and E*Trade Financial (ETFC). While Brevan Howard slashed its position in Berkshire Hathaway (BRK), the hedge fund initiated a stake in Bank of America. Kyle Bass bought up 10 million shares of MGIC Investment (MTG) 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.