Global hedge funds raced to load up on bullish positions in banks, insurance companies and capital markets as September drew to a close, Morgan Stanley said in a client note, catching a tailwind for the financial sector from higher interest rates.

European bank stocks fell by as much as 4% at one point last month, before staging a strong recovery to end September with a gain of 2.6%, while U.S. banks ended the month down 3%.

A two-year whirlwind of central-bank rate hikes has delivered financial companies higher profits, after a decade of low rates and modest growth that depressed margins.

Hedge funds began adding long positions in European banks, insurance companies and capital markets firms in August, reaching a 12-month high by Sept. 21, the bank said.

As for North American financial stocks, hedge funds started the last week of September with low amounts, but had tucked in by the week's end, a separate note released by Morgan Stanley's prime brokerage said on Oct. 2.

"Those areas of the market where HF (hedge fund) ownership was lightest entering the week ultimately ended as the most net bought," the note said.

This was also true for industrial and energy stocks, the bank said.

Both long and short exposure to all European stocks still sat at relatively low levels for U.S. and European hedge funds.

U.S.-based managers' holdings of European equities remain at relatively lower levels than has historically been the case, while European hedge funds' positions in Europe are near their lowest levels since 2010, Morgan Stanley said.

European hedge funds have higher exposure to companies listed in the U.S. and Asian countries other than Japan.

Morgan Stanley, as one of the biggest providers of lending and trading services to hedge funds, is able to track their investment trends.