Hedge funds grow more wary in short financials bet

LONDON (Reuters) - The plunge in Lehman Brothers' LEH.N share price shows there is still money to be made from betting on falling financial stocks, but more and more hedge funds are no longer taking this as a one-way bet.

Some funds that have suffered as financial stocks rebounded over the summer, hurting their short positions, have trimmed back these bets, believing that the further banks' shares fall, the greater the danger of a sharp rally.

Shorting means betting on a lower price for a security in the future.

"I think the massive short in financials has been somewhat trimmed going into the last few months of the year after the late summer volatility and rallies," said Cem Habib, fund of hedge funds manager at Altedge Capital, which runs $700 million.

Kay Bendall, head of research at Blue Planet Investment Management, told Reuters the firm's funds had been short on some U.S. financial stocks last year, but now no longer has these bets on.

"It's because of the volatility. Lehman was down 42 percent yesterday," she said.

"There's obviously lots of problems and write-offs, but I don't think there are any that are in the same situation as Lehman."

For example, while the FTSE All Share Banks index .FTASX8350 is down 23 percent this year, it moved by more than 5 percent in a day on four occasions in July.

Lehman Brothers shares, which have fallen 89 percent year-to-date, tumbled on Thursday as investors questioned the bank's survival after it posted a record quarterly loss of $3.9 billion and unveiled a plan to shed weak assets that was greeted with skepticism.

On Friday they rose as much as 30 percent in Frankfurt LHMH.F before later falling back into negative territory.

Some managers have also started to alter their bets, focusing instead on U.S. regional banks which they believe have been less affected by mark-to-market rules.

"It (shorting financials) used to be more of an index bet and was much wider, but now it's more directed at individual names," said Altedge's Habib.

"People continue to be short, but have moved to regional U.S. banks ... which they think are small enough that the U.S. government will let them slip."

However, not everyone has been short. Legendary fund manager George Soros will have suffered after buying 9.47 million shares in Lehman in the second quarter.

(Editing by Sue Thomas)