Key Points
- Hedge funds have been selling Chinese equities for the fourth consecutive week.
- Goldman Sachs noted increased short positions and reduced long bets from February 28 to March 6.
- Enthusiasm for low-cost AI startup DeepSeek drove early-year buying. Chinese indices, including the Hang Seng and MSCI China, saw strong gains in February.
- Hedge fund net allocation to Chinese equities is estimated at 8.2%, ranking in the 37th percentile over the past five years.
Global hedge funds have been reducing their exposure to Chinese equities for a fourth consecutive week as the earlier enthusiasm fueled by the rise of low-cost AI startup DeepSeek begins to cool. A recent note from Goldman Sachs revealed that funds increased their short bets and trimmed long positions from February 28 to March 6. According to the report, hedge funds have “reversed course” since mid-February, after earlier periods of strong buying in China.
Earlier this year, Chinese stocks attracted significant inflows from hedge funds spurred by the surge in interest generated by DeepSeek. This startup had helped ignite a rally among Chinese tech stocks and potential AI beneficiaries in the world’s second-largest economy, contributing to a notable performance in February. The Hang Seng index jumped 13% in February—the best among global major markets—while the broader MSCI China index rose by 12% that month and gained an additional 6% in the current month.
According to Timothy Moe, chief Asia Pacific strategist at Goldman Sachs, investor sentiment appears to be shifting despite these robust gains as profit-taking sets in after a 30% rally from mid-January lows. Moreover, recent data indicating decelerated trade growth and worsening deflationary pressures cast doubts on Chinese assets’ short-term momentum. As a result, hedge funds have begun reducing their holdings, particularly in regions like North America and Asia’s emerging markets.
Overall, hedge fund exposure to Chinese equities remains relatively modest. Goldman Sachs estimates the net allocation to China—combining onshore and offshore positions—to be around 8.2%, which places it in the 37th percentile over the past five years.
With the year-to-date flow now roughly flat compared to earlier aggressive buying, the once tech-driven rally in Chinese stocks appears to have stalled, prompting investors to reconsider their positions in the face of evolving economic challenges.
