Global hedge funds extended their China equity sell-off for a fourth consecutive week, as the recent enthusiasm for Chinese tech stocks – driven by low-cost AI startup DeepSeek – began to fade, according to a report by Reuters.

The report cites a note from the prime brokerage division at Goldman Sachs as highlighting that between 28 February and 6 March, hedge funds added short positions while trimming long bets, reversing the buying spree that had fuelled a surge in Chinese tech stocks earlier in the year.

According to the note, hedge funds “reversed course” after accumulating significant China equity positions in mid-February. Up until 17 February, China had seen the largest global inflows from hedge fund clients, largely driven by DeepSeek’s emergence as a potential AI disruptor. However, these year-to-date flows are now roughly flat, the bank estimates.

DeepSeek’s rapid rise had initially shifted investor sentiment, triggering a rally in Chinese AI-linked tech stocks. Investors also saw an opportunity in discounted China equities, expecting a catch-up rally.

This led to a 13% surge in Hong Kong’s Hang Seng Index (.HIS) in February, making it the best-performing major global market for the month. Meanwhile, the MSCI China Index (.dMICN00000PUS) climbed 12% in February and has added another 6% in March.

In the note, Goldman Sachs’ Chief Asia Pacific Strategist, Timothy Moe, stated that while the bank remains positive on China equities, the 30% rally from mid-January lows could lead to profit-taking.

Beyond technical factors, weaker China trade data and deepening deflationary pressures are also influencing investor sentiment. These macroeconomic headwinds could further dampen momentum in China-focused hedge fund trades.