At Insider Monkey, we track over 650 hedge funds and analyze their quarterly 13F filings and compile data to see how many hedge funds are invested in thousands of companies at the end of a quarter. When it comes to bank stocks, we can see that hedge funds are bullish on them, not as much as they are bullish on technology, but major banks, such as Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C), JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC), which are also among the biggest commercial banks in New York City are always close to the top the most popular stocks list.
However, during 2017, major banks, like those listed above saw a decline in hedge fund sentiment. On the other hand, smaller and regional banks saw an inflow of capital from hedge funds, although they are still far from overtaking major banks. One of the reasons why hedge funds have been bullish on banks lately, is the prospect of fewer regulations, since President Donald Trump has promised to do a “big number” on the Dodd-Frank Act, a 2010 law that was set after the financial crisis of 2007-2008, which heavily regulated the way many financials institutions operate.
Recently, the US Senate passed a bipartisan bill that eased some regulations on banks. The bill would rewrite some parts of the Dodd-Frank Act and would adjust the size at which banks are subject to some regulatory scrutiny. Smaller banks would also be exempt from some requirements related to loans, mortgages and trading.The House of Representatives also passed its own version of the bill, which also involves deregulation and both houses have to agree and pass a final bill before it’s signed into law.
Under the Senate bill, the threshold above which a bank is considered a systematically important financial institution to $250 billion in assets from $50 billion under the Dodd-Frank Act. One of the benefits from this increase, is that smaller banks won’t be subjected to annual stress tests, which they had to pass in order to pay dividends or buy back stock. The stress tests require banks to build a system that is very expensive and many smaller banks avoided mergers in order to not pass the $50 billion in assets mark.
In this way, the increase of hedge funds’ interest towards regional banks is understandable, so let’s take a closer look at the most popular regional banks, focusing on those that saw the largest increase in popularity during 2017. Looking at stocks that hedge funds are bullish on can provide a smaller investor with many interesting investment opportunities. At Insider Monkey, we have developed a strategy that focuses on best small-cap stocks from the equity portfolios of best-performing hedge funds and this approach has beaten the market by over 20 percentage points since 2014. We share the stock picks from our small-cap strategy in our quarterly newsletters, but we also have a monthly newsletter that focuses on activist funds.