Convinced that many financial stocks are undervalued, a Washington-based investment banking and advisory firm is launching a hedge fund to invest in small banks and thrifts.

Hovde Financial Inc., which primarily works with banks and thrifts having less than $10 billion of assets, said it expects to finish raising $40 million for the fund today. The fund, to be called Financial Institutions Partners LP III, also is to invest in electronic finance companies that have yet to go public.

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