NEW YORK (
) - For U.S. bank stock investors, 2011 was a bad year with shares of many of the largest banks falling nearly 40%. Overall, declines in the sector meant that it underperformed the
S&P 500 Index
by a mile.
But for some of the largest hedge fund investors -- which jump in and out of company shares to gain outsized returns -- bank stock volatility set up them up for large gains. Others threw in the towel or got bullish on the sector at inopportune times.
Financial Select Sector SPDR
exchange traded fund fell over 18% down in 2011, leaving even the smartest investors perplexed on how to make money on bank stocks. After a strong start to the year added to 2010 gains, the index plummeted in August after
Standard & Poor's
cut the ratings on U.S. debt, slamming bank stocks by over 17% from Aug. 2 through Aug.8.
After a choppy summer and fall on issues like ratings downgrades, a worsening of the European debt crisis and increasing legal liabilities related to mortgage assets for bellwethers like
Bank of America
, bank stocks started an epic rally in late November that's carried into 2012.
Of the nation's largest banks, Bank of America has seen its shares rally the most in 2012, with its stock rising over 40%, outpacing the 20%-plus gains of Citigroup, Morgan Stanley and Goldman Sachs, in addition to the more muted 10%-plus gains of JPMorgan, Wells Fargo and
Capital One Financial
. Those gains help to soothe 2011 losses, where Bank of America shares were halved and Citigroup, Goldman Sachs and Morgan Stanley did little better. Of the biggest banks, only Capital One Financial posted a 2011 gain, boosted by its now
Overall, the Financial Select Sector SPDR is up 12% in 2012.
For hedge fund investors who recorded
, the volatility in banking stocks and markets proved to be a challenge. Hennessee Group, an adviser to hedge fund investors, said in January that its
Hennessee Hedge Fund Index
dropped 4.3% in 2011, compared to a flat performance for the
. It was the second year in a row that hedge funds failed to beat equity indices.
Hennessee Group noted that equity markets were driven by macro issues in 2011, "which overshadowed strong corporate earnings and an improving economy." The firm said that several hedge funds expressed frustration in long positions of companies, where they beat expectations but still saw share prices decline more than the broader indices. And while stocks rallied sharply higher in October, managers ended 2011 with low exposure to stock markets, missing on a late-year rally.
Hedge fund magnate
Paulson & Co.
had a famously bad 2011, with his flagship fund drop 51% in 2011 after several bets went terribly wrong.
Here's a look at the bank investors who bought and sold shares of the nation's four largest banks, with insight into what investing strategies work in a sector that can turn bearish to bullish on a dime, and vice versa.
For more on bank stocks, see
Since the crisis, simply following Warren Buffett's
in Wells Fargo has been a top way to earn bank stock gains, and the legendary investor isn't cashing in his chips just yet.
Warren Buffett run
added to his top stake in the San Francisco-based bank, buying up over 22 million shares between September and December of 2011, putting his stake in the company at 7.28%.
Buffett, who has publicly been bullish on the way that Wells Fargo manages its staid business of taking deposits and lending to businesses and consumers keeps on adding to his share position in the bank. Incrementally, he's built an over 300 million share stake starting in 2009 to nearly 400 million shares as of Berkshire's most recent quarterly filing with the
Securities and Exchange Commission
that reflects holdings as of Dec. 31.
More importantly, Buffett's stake has roughly tripled in value to $11.7 billion since 2009, not by making a giant share push but by simply adding to his position in Buffett-like increments as the stock posted big gains.
On a smaller scale, Buffett's Wells Fargo investment is about as easy as any for a smaller investor to match: pick a undervalued or strongly positioned bank and stick with it through thick and thin markets.
Other investment maxims may prove to be more profitable and lossmaking.
After liquidating its Wells Fargo stake by June, investment fund
Marisco Capital Management
returned to the bank, buying 8.9 million shares in the quarter from September to December, according to 13F filings compiled by
. That move may have timed a nice rally in Wells Fargo stock from the mid-$20's to its present share level of over $30.
Meanwhile, hedge fund giant
redoubled its bet on Wells Fargo, trying to repeat a post-crisis investment in the nation's fourth largest bank by assets. D.E. Shaw started buying Wells Fargo shares in September 2009, building a 8.3 million share position from a base of just over 216,000 shares by June 2010, possibly catching a strong recovery in the bank's shares. However, by December 2010, the fund pared its stake by over half to 3.9 million shares. After sitting out the first half of the year, D.E. Shaw then made a big bump in its Wells Fargo position, buying 4.3 million shares between September and December 2011. Its present holding of 9.5 million shares is the funds highest post crisis investment in Wells.
Ken Griffin- run
followed a similar strategy, selling most of a 5.5 million share position between December 2010 and March 2011, only to rebuild his position with a 4.1 million share purchase in the most recent quarter, putting the funds stake at nearly 8.4 million shares.
Westfield Capital Management
also timed Wells Fargo's rally, liquidating its stake from March to June and sitting out a June to September share slide as fear returned to markets. The fund got greedy again in September, building an over 4 million share stake in the most recent quarter.
So who were the unlucky sellers of Wells Fargo shares?
After building a stake in Wells Fargo during the crisis, struggling hedge funder John Paulson sold over 19 million Wells Fargo shares in the most recent quarter, paring his holding by $585 million, or roughly 80% of the position.
JPMorgan-run hedge fund
Highbridge Capital Management
also had a rough time investing in Wells Fargo. A big holder of the company during the crisis, the firm rebuilt its Wells Fargo stake from June to September of 2011, as the banks shares fell 8% in the quarter, but sold nearly $200 million worth of shares in the most recent quarter, ahead of a 10% stock rally.
Wells Fargo's biggest holders are Berkshire Hathaway,
Capital World Investors
, each with over 3% stakes according to recent filings.
In its fourth quarter earnings, Wells Fargo reported better than expected earnings of $4.1 billion or 73 cents per share, compared to a year-ago net income of $3.41 billion or $0.61 per share and a third quarter net income of $4.06 billion or $0.72 per share. Revenue came in at $20.61 billion, down from $21.49 billion a year earlier. In the third quarter, the bank reported revenue of $19.63 billion.
For more on Wells Fargo shares, see
Bank of America
Love Bank of America or hate Bank of America, it depends on whether you invested in the nation's second largest bank by assets at the right time.
The Charlotte, N.C. -based bank saw a near 60% drop in its shares, one of the dogs of the
Dow Jones Industrial Average
in 2011, but it's turned to a market leader in 2012 as investors recalculate its mortgage liabilities and earnings prospects.
A 40%-plus 2012 rally came too late for some of Bank of America's large shareholders like John Paulson's
Paulson Management Co.
. The Investment mogul who was immortalized in Michael Lewis's
The Big Short
for making a wildly profitable short bet on U.S. subprime mortgages prior to the financial crisis and a well-timed investment in U.S. banks near their crisis nadir that catapulted him up the
billionaire list, sold his Bank of America shares prior to a 2012 rally. Paulson liquidated his 64 million share-plus Bank of America holding between September and December of 2011.
Hedge fund peers like
Eton Park Capital Management
Arrowstreet Capital Management
may be far happier about their Bank of America investments. In the most recent quarter, Eton Park build a 20 million plus share position worth over $150 million, while Arrowstreet built an over 14 million share stake and Citadel picked up nearly 12 million shares. All three funds built their positions from scratch, potentially signaling that they are big beneficiaries of the bank's stock recovery over $8 a share.
That rally has put Warren Buffett
on a $5 billion preferred share and warrant investment that the Wizard of Omaha made in the bank as its shares fell near post-crisis lows on concerns of its exposure to legacy U.S. mortgages.
The investment signals that Buffett may consider Bank of America to be his next Wells Fargo. "We agreed to hold it for at least five years, so what I'm thinking about is where Bank of America will be in five years, and nothing in the last 24 hours or 48 hours has changed my views on that," Buffett told
in October. Buffett also made multi-billion dollar preferred share investments in Goldman Sachs and
during the financial crisis.
Bank of Americas biggest holders are
, each with over 2% share stakes in the company, as of their latest filings.
For more on Bank of America, see
Safe and steady compared to many of its investment banking and megabank peers, JPMorgan proved to be anything but for some hedge fund investors, with some cutting out at the wrong time and others cutting in opportunistically.
In 2011, JPMorgan's shares fell over 20%, with the bulk of declines coming in the second half of the year. For some hedge fund investors like
Two Sigma Investments
Eton Park Capital Management
, it was enough to sell out of the nation's leading bank by assets.
Both Two Sigma and Eton Park sold their 2.4 million-plus share stakes in the quarter ended in December, missing out on an over 14% 2012 share rally for JPMorgan. Two Sigma built its stake from June through September, according to regulatory filings, while Eton Park built its JPMorgan stake to 8 million shares from March 2010 to December 2010, and then began paring its holding to zero starting in June.
Others got bullish on JPMorgan even after a rough third quarter where the bank's bonds traded lower and earnings slumped near post-crisis lows.
built up roughly 3.6 million and 2.6 million their stakes respectively in JPMorgan during the most recent quarter ended in December. Also standing to benefit from a late 2010 rally and strong 2012 gains is
Pyramis Global Advisers
, which more than doubled its JPMorgan stake with 3.4 million in share purchases during the quarter.
Overall, JPMorgan's largest shareholders are
, each with over 3% share stakes, according to their latest regulatory filings.
In its fourth quarter, JPMorgan reported an earnings drop of 23%, in line with Wall Street expectations, as the a debt crisis in Europe depressed trading deal and trading volumes.
A sign of strength was the banks solid loan growth. Total loans rose 4% quarter-on-quarter, with a 17% increase in middle-market loans, a 73% jump in trade loans and a 5% increase in business banking loans.
For more on JPMorgan shares, see
The U.S. money center bank most exposed to and emerging market book or slowdown, legendary investors cut their bets on Citigroup, even as analysts expect that the bank will announce a
Other investors may have timed a recovery in shares that may continue to grow in 2012, even if legal payouts and writedowns on pre-crisis U.S. mortgage liabilities continue to rise.
John Paulson sold out of his Citigroup shares, matching a similar move made with Bank of America, missing out on an over 23% 2012 share gain, adding to gains from a mid-November rally. Paulson sold over 25 million shares in the most recent quarter. Bruce Berkowitz-run
Fairholme Capital Management
also cut its Citigroup stake, paring holdings by over 22.8 million, or roughly 90% in the quarter. Both Paulson and Fairholme Capital Management were two of Citigroup's biggest three share sellers, according to their most recent filings.
Marisco Capital Management
, a big buyer of Wells Fargo shares, also turned bullish on Citigroup in the most recent quarter, building up a near 5 million share position.
York Capital Management
also made a big Citigroup bet in the quarter by more than tripling its holding in the New York-based bank to 4.5 million shares.
Citigroup closed 2011 with a big fourth quarter earnings miss, but the bank may hold major value when compared to its Wall Street peers as it enters 2012, according to analysts.
Citigroup reported fourth quarter earnings per share of 38 cents, missing a 50 cent a share estimate, according to data compiled by Zacks. While Citigroup's quarterly earnings missed estimates, the numbers still helped propel the bank to an $11.3 billion 2011 profit, its best year since 2006.
The miss was largely due to a $163 million loss at its investment bank, which suffered with the rest of Wall Street in late 2011. However, if markets pick up from a "very, very weak" December, the bank may be primed for a 2012 earnings boost as other international businesses continue to grow and may benefit from local currency gains.
For more on Citigroup shares, see why
Citigroup's future is brighter than you think
-- Written by Antoine Gara in New York