By Nell Mackenzie

LONDON Hedge funds ditched short bets against U.S. regional banks as of the end of August and turned bullish on the broader U.S. financial sector, according to a Goldman Sachs note, just as bank stock prices began to rise.

U.S. financial services companies including banks, trading firms and those working in capital markets were among the most sought-after stocks in the week ended Sept. 1, according to the note by Goldman's prime brokerage desk, which serves hedge funds.

The ratio of long trades compared with short positions on U.S. regional banks has risen by 26% since a year low in mid-July 2023, when traders were mostly short the sector, the bank said. A short or bearish bet borrows a stock in order to sell hoping its price will decline.

An index of U.S. regional bank stocks has recovered roughly 20% of its value from a two-year low hit in May following the failure of Silicon Valley Bank, Signature Bank and First Republic.

Treasury Secretary Janet Yellen said in May that nearly all banks had access to sufficient liquidity, but warned that profit pressures might lead to consolidation in the sector.

Short positions on larger U.S. banks have also declined since mid-July, with hedge fund long positions rising about 14% against short bets, the Goldman note showed.

Most of the stock buying on U.S. regional banks comprised of hedge funds buying back stock that was borrowed for the purpose of short bets, or so-called short covering, Goldman said.

Across broader U.S. financial services, hedge funds finished August with net long positions, the note said.

The sector often includes companies such as larger banks, savings and loans, asset management companies, credit services and investment brokerage firms.

(Reporting by Nell Mackenzie; Editing by Dhara Ranasinghe and David Holmes)