Why Bank Performance Deteriorated In March

March was notoriously a tough month for banks.  After a supposedly good January and February, something went wrong and business deteriorated.

We have this on the authority of JP Morgan Chase CEO Jamie Dimon.

Exactly what went wrong is a bit of a mystery, however. The stock market rallied hard, bonds gained 3.3% and the commercial real estate mortgage market improved as well.  At first glance it looks like March should have been a good month for banks. What happened?

New data about hedge fund performance may provide a clue. The Hennessee Hedge Fund Index, which attempts to measure the performance of hedge funds across a variety of strategies, gained just 1.4% in March, badly underperforming the broader markets. Since the proprietary trading operations inside banks follow hedge fund strategies, its safe to assume that they also badly underperformed. 

“Most hedge funds were caught with tight net exposures and were unable to participate in the rally,” Charles Gradante, co-founder of New York-based Hennessee Group, is quoted as saying in this Investment News story. “Managers were also hurt as the sectors they have been heavily short, such as financials, consumer discretionary and materials, were the sectors that rallied the strongest.”

In other words, the trading performance at banks may have been hurt by the rally in financial stocks.

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