Despite the GameStop saga and the implosion of Archegos, banks and hedge funds had an explosive quarter. This is how they did it.

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Goldman Sachs swept Archegos to post a huge increase in profits.

So far this has been a dramatic year for the financial markets. Retail traders inflated GameStop in January, captivating the financial world and hitting hedge funds that had bet against the stock.

Then in March, investment fund Archegos dramatically imploded, wiping out a $ 20 billion fortune and sending banks scrambling to distance themselves from the collapse.

Yet despite this turmoil, banks and hedge funds have just had one of the best quarters in recent memory, shattering expectations and making big bucks for their clients.

How did they do it? JPMorgan boss Jamie Dimon put it right when his bank’s profits came out: “Spending stimulus, potential infrastructure spending, further quantitative easing, strong consumer and business balance sheets and euphoria around the potential end of the pandemic. “

Hedge funds turn things around after tough January

The year got off to a bad start for many hedge funds, when a group of online retail traders decided to pump up GameStop action. A number of high profile funds, which had bet against the ailing company, were hit hard.

A story built in the media and among retail investors themselves that a day-trading army was besieging Wall Street. And in some places it was: Gabe Plotkin’s Melvin Capital, for example, suffered a 49% loss on its investments in the first quarter, according to reports.

But the GameStop saga has only been felt by a handful of companies, says Andrew Beer, a managing member of Dynamic Beta Investments, an investment firm that follows certain hedge fund tactics.

Hedge funds gained 4.8% in the first three months of 2021, the best first quarter performance since the heady days before the financial crisis, according to Eurekahedge data. North American hedge funds advanced 6.8%.

“GameStop for me was a storm in a teapot,” Beer told Insider. “Most of the funds did well … because what was most important to them was getting the value out of the way.”

The first quarter was marked by stock market volatility, with investors positioned for stronger growth, moving from big tech to stocks in overlooked sectors such as financials and industrials.

Beer says that with the market undergoing “regime changes,” hedge funds have performed well because they had the flexibility and agility “to be technology investors in 2019, but to value investors and small cap investors today ”.

There were also opportunities for hedge funds that specialize in betting against, or short circuit, stocks, says Mohammad Hassan, chief analyst at Eurekahedge.

“The growth factor struggled in the first quarter, creating short-term opportunities for hedge fund managers as unprofitable tech stocks got a ‘speeding ticket’, so to speak,” a- he told Insider.

Banks Crush Profit Expectations As Market Income Explodes

Banks on Wall Street also escaped the Archegos implosion largely unscathed. Morgan Stanley posted a record profit despite a fund-related hit of $ 911 million.

Like hedge funds, big banks have also reaped the rewards of bustling financial markets, helping big names like JPMorgan and Goldman Sachs wow analysts with record profits.

Profits of S&P 500 banks rose 248% year on year, according to FactSet. Goldman Sachs investment banking income soared 105% as traders at the lender took advantage of the rise and volatility in the markets.

Even at the more consumer-focused Bank of America, sales and trading revenue grew 17% as customers gambled in the marketplace, more than doubling its profits.

The boom in retail, which sparked the GameStop saga, may have also helped, says Filippo Alloatti, senior credit analyst at Federated Hermes.

“[Retail investors] can trade with some of the bank’s platforms, but [it also] brings more entry into stocks and therefore makes it easier to do business in equity markets, ”he told Insider.

Above all, the improved economic outlook after the arrival of COVID-19 vaccines. In addition, the announcement of more major stimulus measures helped banks clear $ 10.2 billion in provisions set aside to cover loan losses, according to FactSet.

“There is no doubt that the bear scenarios that the banks had put in these forecasts for building up their loan loss reserves worsened less,” Ken Usdin, US banking analyst at Jefferies, told Insider.

But there are some dangers on the horizon for the banks. Although many of those involved appear to have escaped the Archegos affair unscathed, Swiss lender Credit Suisse is still in trouble and similar events could still have wider ramifications.

Meanwhile, the traditional activity of banks of lending slowed down as the stimulus money helped people pay off their debts.

The Federal Reserve seems ready to keep the party going

Analysts say the Federal Reserve underpinned a very good quarter for banks and hedge funds, which made borrowing extremely cheap and injected liquidity into the economy and markets.

William McChesney Martin, Chairman of the Fed in the 1950s, popular the Fed’s job is to provide the party with the oomph, but pull it back when the going gets tough.

Beer said that no longer appeared to be the case, with the central bank saying it wanted to see a hot job market and would tolerate higher inflation. “The Fed basically said, here’s the punch bowl, go for it, and the party is going to continue long after the curfew,” he said.

JPMorgan’s Dimon is optimistic, despite residual concerns about declining lending and increasing coronavirus cases around the world, saying: “We believe the economy has the potential to have extremely robust growth over several years. “

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