Stockpicker’s Paradise

It’s coming up to ten years since I wound up my hedge fund. When it launched over a decade earlier, its objective was to generate absolute returns by investing – long and short – across the global financial sector. The sector focus was key. As specialists, we were equipped to ask the questions generalists didn’t know in an effort to uncover opportunities in this large yet opaque corner of the market.

For a long time, it worked. The sector was deep enough and disparate enough to sustain good returns if you knew where to look. And we looked everywhere: government-run banks in India, demutualised exchanges in Europe, consumer finance startups in the US. We shorted Northern Rock, Washington Mutual and Bear Stearns before they went bust, and we bought alternative asset managers, payments companies and brokerage firms before they rallied. At peak, we managed over $4 billion of assets.

But then things got hard. The free money regime of 2009-2021 kept many bad companies on life support and squeezed the profitability out of good ones. Regulation created uncertainty and subordinated the role of shareholders in banks. For many years, sector performance flatlined and, critically, dispersion of returns within it remained muted.

We could have concentrated our portfolio around Visa or Moody’s but sadly we didn’t have the foresight. So we closed – and we weren’t the only ones. Earlier this year I hosted Davide Serra, founder and CEO of Algebris Investments, on Net Interest Extra. “When we started in 2006, there were eleven specialists on financials,” he reminded me. “We’re now the only one left.”1

The thing about markets is that nothing is permanent and, recently, the opportunity to extract returns from within the financial sector has re-emerged. Whisper it quietly but away from the distortion of the Magnificent Seven, banks have been outperforming even technology. In Europe, bank stocks are up almost 60% this year, versus tech which is up only 3%. In the US, banks are up 29% against the Nasdaq up 20%. Indeed, the best performing megacap stock in the S&P 500 this year is a financial. And – meat and drink to hedge funds – the worst performing stock? Also a financial.

One investor to spot the opportunity is Johnny de la Hey. Johnny started his career as a research analyst covering UK and European banks in London. In 1996, he joined Tiger Management ...