The recent rally in European bank stocks has given some nice profits to hedge funds as they scramble to catch a piece of the action.  Hedge funds continue to put money in Euro bank stocks because they believe that the newly injected money from central banks will help keep the gains rolling in.

So far this year, hedge fund managers have seen their best performance since 2009.  The average equity hedge fund was up about 3.8% in January and up about 1.6%, according to Hedge Fund Research.  One of the big gainers was hedge fund Toscafund, managed by Martin Hughes, is up around 7% and Toscafund’s more specialist fund is up around 18%.  Crispin Odey’s European fund is up 14.7% in January and Lansdowne Partners UK fund is up 5.7%.  Both of these funds have heavy exposure to UK bank stocks.   Hedge funds all together have been placing huge bets on bank stocks such as Italy’s UniCredit, Spain’s Santander, and UK’s Barclays and the reward has been huge.

Nigel Gliksten, partner of Toscafund, said that banks “were the cheapest sector in the market” at the beginning of the year.  Most managers believed banks had priced in a “doomsday” scenario which made them cheaper and a better opportunity to make money.   The European central banks helped hedge funds realize gains as they continued to vow monetary aid to banks to keep them afloat, much like what the Federal Reserve did for US banks back in 2008.

Hedge funds say they will continue to invest in European banks with the belief that Europe may be bottoming with Greece’s progress.  However, there is still a long way to go to be able to confirm for sure that Europe is on the tail end of its debt crisis and that the situation is under control.  It isn’t likely that we will see this in the first half of 2012 but rather may be in the second half with positive signs along the way.  If the market continues to see progress being made in Europe, you can expect a rally and a continuing rally.  The US (although missed on retail numbers today) is making headway on its recovery and jobs are starting to slowly creep back into the picture.  Europe is slowly starting to get debt in a more manageable state.  This will lead us into a new era of bullishness, if we can just get there and stay there, that is the problem.