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Hedge Funds Build Holdings in Underpriced Chinese Equities

Investors eye underpriced stocks in the world’s no-2 economy, which have been rallying since February as Beijing ramped up moves to address economic challenges

Screens outside Exchange Square in Hong Kong show stock indexes and prices in this file Reuters image.


Global hedge funds have been building up their holdings of Chinese equities amid bets that beaten-down stocks on the mainland will rise again.

A horde of investors have been buying for a fourth straight week, in a bid to get ahead of a rebound in the market.

Goldman Sachs prime brokerage team said in a note on Friday that hedge funds bought Chinese stocks in seven of the past eight weeks. However, the report did not disclose the amount of purchase.


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Stocks in the world’s second-largest economy have been rallying since February as Beijing ramped up measures to address economic challenges and as macro data showed signs of recovery.


MSCI China up 16% this year

China markets have unexpectedly outperformed world’s major markets so far this year with Hong Kong’s Hang Seng Index up by a third from its nadir in January. The MSCI China index is up 16% so far this year.

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

Some hedge fund investors are betting on the rally by buying call options as a way to capitalize bigger gains from the rise in stocks, Goldman Sachs said in a separate note on Friday.

“The combination of decade-low allocations to China from both hedge- and long-only mandates and the blistering pace of the recovery has caught investors off-guard in the past months,” analysts led by Kinger Lau wrote.

“The resulting performance pressures may have incentivized investors to close underweight gaps or raise exposures in Chinese stocks, likely reinforcing and fuelling the upturn as the positive spiral takes hold.”

In its most recent moves to restore market confidence, China last week kicked off 1 trillion yuan ($138 billion) in stimulus bond issues, and unveiled a flurry of measures to support the country’s struggling housing market.

Yet not all investors are convinced by the recovery narrative.

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

“The market still offers us more short opportunities than longs, particularly as we encounter more volatility due to ongoing economic challenges,” said Byron Gill, managing partner at Indus Capital, citing the country’s increasing deflation pressures.


  • Reuters with additional editing by Jim Pollard



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Jim Pollard

Jim Pollard is an Australian journalist based in Thailand since 1999. He worked for News Ltd papers in Sydney, Perth, London and Melbourne before travelling through SE Asia in the late 90s. He was a senior editor at The Nation for 17+ years.


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