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Global hedge funds increase Chinese equity holdings amid market rebound

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Global hedge funds have increased their holdings of Chinese equities for the fourth consecutive week, joining the growing number of investors anticipating a market rebound, according to a report by Reuters citing a note from Goldman Sachs’ prime brokerage team. 

Stocks in the world’s second-largest economy, which had been underperforming, have been rallying since February. This is in response to Beijing’s increased efforts to tackle economic challenges and signs of recovery in macroeconomic data. 

Goldman Sachs’ note reveals that hedge funds have purchased Chinese stocks in seven of the past eight weeks, though the amount of the purchase was not disclosed. 

So far this year, China’s markets have outperformed the world’s major markets unexpectedly. The Hang Seng Index in Hong Kong has risen by a third from its lowest point in January, and the MSCI China index has increased by 16%. 

Goldman Sachs raised the price targets for both the MSCI China and China’s blue-chip CSI 300 Index on Monday. 

According to a separate note from Goldman Sachs last Friday, some hedge fund investors are capitalising on the rally by purchasing call options, expecting to gain more from the rise in stocks. 

Goldman Sachs’ analysts, led by Kinger Lau, wrote that the combination of decade-low allocations to China from both hedge and long-only mandates and the rapid pace of recovery has taken investors by surprise in recent months. 

The performance pressures resulting from this may have encouraged investors to close underweight gaps or increase exposures in Chinese stocks, likely reinforcing and fueling the upturn as the positive spiral takes hold. 

In its latest efforts to restore market confidence, China initiated RMB1tn ($138bn) stimulus bond issues last week and introduced a series of measures to support the country’s struggling housing market. 

New York-based hedge fund Indus Capital, however, remains underweight on China, although it has recently added some stocks. 

In a Reuters interview, Byron Gill, a Managing Partner at Indus Capital, said: “The market still offers us more short opportunities than longs, particularly as we encounter more volatility due to ongoing economic challenges.” He cited the country’s increasing deflation pressures as a concern. 


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