Lloyds bet starts to pay off for hedge fund Lansdowne

Its flagship $7.5 billion Developed Markets fund is up 14.21 percent this year, according to a letter sent to clients and obtained by Reuters, aided by a recovery in Lloyds shares.

Last year Lansdowne's holding in the lender cost it dearly, with the Developed Markets fund losing a fifth of its value, dragged down by a 60 percent slump in Lloyds' share price.

The hedge fund was among those heavily criticised for betting against UK banks, including Barclays Plc (BARC.L) and later-nationalised Northern Rock, at the height of the financial crisis.

But since then, the Developed Markets fund, co-managed by Stuart Roden and Peter Davies, has invested billions backing banks including JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N), and emerged as one of the biggest shareholders in Lloyds behind the UK government.

The monthly note said Lloyds had benefited from strong earnings and the "sense that banking regulation will take on a more pragmatic tone", following Mark Carney's appointment as head of the Bank of England and publication of the central bank's Financial Stability Report.

After a 10 percent rise in November, Lloyds (LLOY.L) shares are now up 72 percent in 2012, but are still below their 2010 levels when Lansdowne's holding emerged.

BIG POSITIONS

Roden and Davies also took advantage of a November sell-off in U.S. stocks to add to U.S. bank positions, the letter showed.

They did not name the banks, but according to recent filings with U.S. regulators in the third quarter the fund owned stakes in JP Morgan and Wells Fargo, currently valued at more than $660 million and $440 million respectively.

In contrast to its big positions in banks with large retail franchises, last year Lansdowne sold out of a $850 million holding in investment bank Goldman Sachs Group Inc (GS.N).

Roden and Davies also said markets in the United States had overplayed worries about how the country will tackle its ballooning deficit, known as the "fiscal cliff".

"While we remain cognisant of the need for a successful resolution to this issue, we were slightly surprised by markets' weakness and used it as an opportunity to increase selectively the Fund's net exposure," they wrote.

The fund benefited from owning Nike Inc (NKE.N), Diageo Plc (DGE.L) and Ryanair Holdings Plc (RYA.I) in November, as well as shorting - betting against - an unnamed U.S. retail stock, the letter said.

Overall the fund has a net long position - of 37.4 percent - in North America, a 12.3 percent net long on UK stocks and a 6.2 percent net short on the rest of Europe.

Lansdowne manages $12 billion in assets and was founded by Steven Heinz and UK Conservative Party donor Paul Ruddock in 1998. The firm declined to comment.

(Editing by David Holmes)