Kaifeng Investment Management, a macro hedge fund that posted an impressive 76% gain last year, believes the market is underestimating the potential for significant US interest rate cuts in 2026, according to a report by Bloomberg.
The report cites Gao Bin, Co-Manager of the Shenzhen-based fund, as saying that the market is not fully factoring in the possible scale of rate reductions under a more dovish Federal Reserve chair, which President Donald Trump is expected to nominate next year. Gao, who also serves as the CEO of Kaifeng’s Hong Kong unit, said that these cuts could come as the economy softens amid a growing trade war.
“The market is not pricing in the full potential for rate cuts in 2026,” Gao said. “With a softening economy next year, regardless of inflation, we anticipate Trump will push the Federal Reserve to cut rates.”
He added that, given ongoing inflation, significant rate cuts are unlikely this year, but the outlook for 2026 is much clearer, with rate cuts becoming a likely move to counter a slowing economy.
Kaifeng, which oversees approximately $1.3bn in assets, is also increasing its bullish bets on Chinese equities as the internal and external economic conditions in China improve. As a hedge against a potential global recession triggered by trade tensions, the fund is betting that US two-year rates will eventually fall below one-year rates.
Despite recent data showing broad-based inflation in the US, the market has scaled back expectations for immediate rate cuts, with futures markets now forecasting fewer than two quarter-point cuts by December and just one more quarter-point decrease in 2026.
Gao’s macro fund strategy last year saw significant gains, particularly from active trading of futures, driven by expectations of US rates moving within a specific range. The fund was also positioned to take advantage of higher Japanese rates.
The fund’s profitable trades also included short positions in bulk commodities, betting on falling prices for rebar steel and iron ore amid a slowdown in China’s housing market. Kaifeng’s bearish stance on these commodities paid off as the Chinese housing market faced slower growth and government efforts to complete unfinished projects came to an end.
Kaifeng’s long positions in Chinese stocks and short positions in Chinese government bonds were particularly rewarding in September, as the MSCI China Index surged by 23% following Beijing’s commitment to stabilise housing and capital markets. With a shift in government policy to focus on boosting household consumption rather than infrastructure investment, Kaifeng remains optimistic about the outlook for Chinese equities in 2024.
However, Gao remains cautious about the potential for government fiscal constraints in China. The fund has reduced exposure to sectors related to the global decarbonisation drive, such as aluminium and copper, amid fears that the US may exert pressure on Europe and Japan, potentially stalling the transition to cleaner energy.
The fund has also exited its single-stock investments in Chinese high-tech manufacturing sectors like electric vehicles, robotics, drones, semiconductors, and solar panels, due to concerns that these companies might be added to US sanction lists.
Kaifeng’s two Hong Kong-based macro funds have cut their gross exposure by more than 20% this year in response to the uncertainty surrounding Trump’s presidency and its potential impact on global markets.
