Hedge Funds Laugh at SVB Bankruptcy... 9.5 Trillion Won Profit from Short Selling Bank Stocks

"Liquidity Crisis Over, but Repayment Crisis Begins"

Last month, following the bankruptcy of the U.S. Silicon Valley Bank (SVB) due to a 'bank run' (massive withdrawal of deposits), global hedge funds that short-sold bank stocks reportedly earned $7.2 billion (approximately 9.5 trillion KRW) in profits within a month.

[Image source=Reuters Yonhap News]

On the 5th (local time), major foreign media outlets cited financial information analytics firm Ortex, reporting that investors made the largest profits from short-selling bank stocks since the 2008 global financial crisis. Short selling refers to an investment strategy where investors borrow stocks they expect to decline in price, sell them, and then buy them back at a lower price to return the shares, thereby making a profit.

According to Ortex, investors took short positions in the entire U.S. and European banking sectors over the past month, earning $7.2 billion in profits. Looking at individual banks, the estimated unrealized gains from short-selling SVB, which entered bankruptcy proceedings on the 10th of last month as the epicenter of the crisis, amount to about $1.3 billion. First Republic Bank, which received a capital injection of $30 billion (approximately 39.5 trillion KRW) from private financial institutions including JP Morgan amid fears it could become the 'second SVB,' generated $848 million (about 1.1 trillion KRW) in short-selling profits. Credit Suisse (CS), which was ultimately sold to Swiss bank UBS triggered by this crisis, yielded $684 million (about 900 billion KRW) in short-selling profits for investors. The stocks of these two companies plunged 89% and 71%, respectively, over the past month.

Hedge funds betting on the decline of bank stocks achieved significant returns. The global hedge fund Argonaut Capital's 'Argonaut Absolute Return Fund' earned over 6% returns in a short period after the SVB crisis through short-selling CS and First Republic. The UK hedge fund Marshall Wace also shorted 0.7% of shares in Germany's largest bank, Deutsche Bank, earning a whopping $40 million (about 52.7 billion KRW).

Global hedge funds increased their short positions as concerns grew that the SVB crisis could trigger a domino effect of bankruptcies across the global banking sector. According to S&P Global Market Intelligence, the short interest in CS surged from 3.5% in early March to 14% on the 20th of last month when news of its sale to UBS broke. The short interest in First Republic also skyrocketed from 1.3% in early March to 38.5% on the 30th of last month.

While the SVB crisis was quickly contained thanks to swift responses from various countries, there are forecasts that additional crises could recur. Barry Norris, Chief Investment Officer (CIO) of Argonaut Capital, referring to the Federal Reserve's liquidity support program, stated, "The risk of liquidity crises among vulnerable U.S. regional banks has decreased, but high interest rates increase repayment risks for borrowers, which could have catastrophic effects on banks' net interest margins (NIM)." He added, "The liquidity crisis is over, but the repayment crisis is just beginning."

This content was produced with the assistance of AI translation services.