Global hedge funds are making calculated bets on Chinese stocks, seeking profits amid shifting US-China trade relations and positioning themselves for wins whether or not Beijing strikes a deal with Donald Trump, according to a report by Reuters.
The report cites Morgan Stanley as highlighting that hedge fund holdings of Chinese equities are at their highest levels in a year, though still historically low. US hedge funds, which form the industry’s largest segment, currently allocate around 3% of their portfolios to China, a modest exposure compared to the 60% directed toward US markets, as noted in a recent Goldman Sachs report.
The mixed sentiment among hedge funds stems from contrasting economic landscapes. While the US market remains buoyed by expectations of deregulation and tax cuts under Trump, China is grappling with a prolonged real estate crisis and mounting debt. However, hedge funds that avoided Chinese stocks missed out on a significant rally from September, when optimism over economic stimulus drove the first annual gain in Chinese equities since 2020.
Recognising the potential for further gains, some hedge funds are re-entering the market through lower-risk strategies. David Aspell, Portfolio Manager at Mount Lucas, a $1.7bn macro hedge fund, has adopted a cautious yet opportunistic approach by purchasing call options — contracts that allow him to buy stocks at a specified price only if they reach a higher threshold. These options, currently undervalued, provide upside potential without excessive risk.
Aspell has also taken positions in China-focused index funds and individual stocks, betting that Trump will pursue a trade agreement that favours US interests while reducing tariff pressures on China.
Initially proposing a 60% tariff on Chinese imports, the figure has since been revised to 10%, offering Beijing a potential path to negotiation.
Other hedge fund managers see deep value in specific Chinese stocks. Boaz Weinstein, founder of the $5bn Saba Capital Management, pointed out that some Chinese tech firms are trading below their cash flow levels after expenses, making them highly attractive for long-term investors. “Certain Chinese tech stocks are profitable and deeply undervalued companies with market-leading businesses,” Weinstein said.
Not all hedge funds are fully convinced, though. Jon Withaar, who manages an Asia-focused special situations fund at Pictet Asset Management, has increased exposure to Chinese stocks but remains cautious. Concerned about the pace and composition of China’s latest tech-driven rally, Withaar has hedged his portfolio with put options to guard against potential declines.
The explosive growth of Chinese artificial intelligence (AI) companies has further fuelled hedge fund interest. The emergence of DeepSeek, a low-cost AI model that topped Apple Store downloads, highlighted China’s rapid technological advancements. “AI is a mega-trend that will persist regardless of how the US-China trade war unfolds,” said Fang Zheng, chief investment officer at Hong Kong-based Keywise Capital.
Hedge fund giant Bridgewater Associates also sees long-term value in geographic diversification, including China. Co-Chief Investment Officer Karen Karniol-Tambour recently wrote to investors, emphasising that rising global economic fragmentation will create both winners and losers, making diversification essential.
BNP Paribas’ 2025 Hedge Fund Outlook indicates that investor sentiment toward China is shifting. While previous years saw significant capital withdrawals — 42% of investors reduced exposure in 2023 — this trend appears to be reversing. The report notes that 7% of surveyed investors now plan to increase their allocations to China, signalling renewed confidence in the market.
