Hedge funds made a sizable bet on financial stocks in the second quarter, according to a a Denko Group report on world wide hedge-fund holdings.

During the second quarter of 2009, hedge funds increased their ownership in financial stocks by 57.2% to $68.9 billion, compared with the first quarter. The funds now own 4.3% of the sector's market capitalization. That's a historically high level, the report said.

The Denko Group "Hedge Fund Tracking Survey" report adds backs up the industry analyst view that hedge-fund managers thought financials were undervalued during the quarter, after a rough 2008 and start to 2009. Hedge funds' surge into financial stocks explains some of the second-quarter price increases in these stocks.

Denko's research, which looks at hedge funds' end-of-quarter 13-F filings with the Securities and Exchange Commission, suggests that hedge funds' larger exposure was from buying in the open market, participation in equity raises, and short covering.

Net short exposure of financials rose only 6.8% to $58 billion, while long exposure increased 61% to $73 billion. Hedge funds were net long financials position at the end of the second quarter, after being net short in the first.

By the second quarter's end, hedge funds owned 17% of Regions, up from just 3% at the end of the first quarter. Redemptions at hedge funds have eased, which means fewer hedge funds have been forced to sell stocks they might have preferred holding.

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