While Chinese stocks have underperformed globally over the past year, a classic hedge fund strategy has seen impressive returns in the region with long-short trades returning over 10% through late June this year, according to a report by Bloomberg.
The report cites data from Goldman Sachs Group as confirming that Chinese gains have surpassed those seen in both the US and Europe at 7% and 6% respectively.
The success of this strategy in China is attributed to the significant performance divergence among the nation’s shares. While industrial stocks have thrived due to state policies, consumer and property stocks have struggled amid economic challenges. This market structure, characterised by high retail participation, low institutional participation and minimal analyst coverage, creates structural inefficiencies ripe for exploitation by long-short strategies.
Despite new restrictions on short selling making it harder for onshore quantitative funds, offshore fundamental stock pickers remain unaffected. They can short American depositary receipts, Hong Kong-listed shares or use derivatives to bet against mainland equities.
While the long-short strategy has yielded strong returns in China, the number of practitioners remains relatively small. Of the approximately 600 global equity long-short funds with assets of at least $50m and a track record of 18 months, only 35 focus exclusively on China, according to PivotalPath.
The divergence in Chinese stocks is evident, with the energy sector of the MSCI China Index rising 27% through mid-July, while the healthcare sector fell 27%. UBS O’Connor’s China long-short fund returned 15% this year through 12 July, boosted by gains in PetroChina Co and China Shenhua Energy Co, as state-owned enterprises were urged to improve shareholder returns.
