Hedge Funds Pile Into China Looking for Any Way to Gain Exposure

Hedge funds are piling into Chinese stocks at a record pace on bets Beijing’s stimulus blitz will speed up the recovery of the nation’s struggling economy.

US-based Mount Lucas Management has entered into bullish positions on China exchange-traded funds, while Singapore’s GAO Capital and South Korea’s Timefolio Asset Management are buying Chinese large cap stocks. Tribeca Investment Partners in Sydney is snapping up proxies such as Australian miners.

“There are many people that hated the space or were sick of it after many false starts, and are now looking to buy,” said David Aspell, chief investment officer at Pennsylvania-based Mount Lucas, who has also entered into call spreads for companies such as JD.com Inc. across some funds. “Stocks often bottom and rally hard before the economy does.”

Chinese stocks entered a bull market Monday when they posted their biggest surge since 2008 on optimism Beijing’s cocktail of stimulus and policy aid will pull the economy out of its malaise. Hedge funds were among the major buyers, making their biggest ever net purchases of the nation’s shares during the week to Sept. 26, according to data from Goldman Sachs Group Inc.’s prime brokerage desk.

The bounceback is fueling optimism the three-year run of losses for Chinese shares is over. The market, which saw almost half its value wiped out from a 2021 high through to mid-September, is suddenly attracting many of the biggest names in the fund industry. Billionaire investor David Tepper is buying more of “everything” related to China, while the world’s biggest money manager, BlackRock Inc., is now overweight Chinese shares.

The rally has been so frantic that some quantitative hedge funds that had taken short positions are being said to face margin calls. Some money managers have also imposed caps on how much retail investors can buy amid a deluge of interest.

Investors “don’t even need to stock pick now,” said Chauwei Yak, chief executive at GAO Capital, a multi-strategy hedge fund. “We had lowered our net exposure in China with arbitrage strategies previously but shifted back to long,” she said.

While Chinese shares are currently outperforming their global peers, some investors remain concerned the rally may be short-lived should the government fail to follow up on its present initiatives.

The prolonged slump in the nation’s equities — fueled by a housing market crisis and deflation — has hammered the China returns of investment titans such as T. Rowe Price Group and helped shutter hedge funds like Asia Genesis Asset Management Pte.

In Singapore, Blue Edge Advisors is approaching the rally with caution. “We’re taking it slow because of the skepticism involved,” said fund manager Calvin Yeoh, whose firm has some exposure to Chinese stocks through derivatives such as futures on the FTSE China A50 Index.

In commodity-reliant Australia, Tribeca’s Jun Bei Liu is buying mining stocks such as Fortescue Ltd. as proxies to the Chinese equity market. The Sydney-based money manager is still reserved about how long the latest rally can last, adding that much will also depend on the outcome of the US presidential election and the possibility of trade tariffs.

“It’s very hard to see it being sustained until we have clarity out of the US,” she said.

Others have more conviction.

“The worst of negative China sentiment is over,” said Nigel Peh, a fund manager at Timefolio Asset Management in Singapore. “The unprecedented measures show the authorities’ willingness to put a bottom on the issues they are facing.”