Macro bets help hedge funds ride rough Chinese markets

HONG KONG, Oct 11 (Reuters) – The hedge funds, which have managed to weather and outperform China’s choppy stock markets so far this year, say betting on macroeconomic changes has helped them.

One such fund is Stanley Tao’s $230 million Golden Nest Greater China Fund. The hedge fund posted a net return of about 2.4% for September, according to internal estimates, and is down 1.2% over the first nine months.

This is contrasted by the MSCI China (.dMICN00000PUS) dropping about 30% in the nine months to September, making it the worst first nine months since 2008. The Shanghai Composite Index (.SSEC) lost 16% over the same period, falling 5.5% in September alone.

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Extreme risk aversion and bearish bets on internet, real estate and healthcare sectors helped the fund weather the strong headwinds, said Tao, founder and CIO at Golden Nest Capital Management.

Tao said his fund has started to reduce exposure to technology stocks and has declined since late 2020 after monitoring regulatory developments and external risks from an audit dispute with US regulators and recognizing the Chinese government’s determination to implement a ” disorderly capital expansion” in technology companies.

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China-focused long-short equity funds lost 13.5% through the end of August, according to With Intelligence’s Eurekahedge data, in sharp contrast to a 1.1% gain for China macro managers.

Macro strategies are the biggest winners this year, with hedge funds benefiting from the volatility induced by the differential pace of global interest rate hikes and regulatory changes – and taking advantage of opportunities not seen in a decade of uniformly loose monetary policy. For stockpickers, top-down research is also a key factor in success or failure.

“Ignoring the importance of macro research could be a huge mistake for some fundamental investors,” Tao said, adding that such macro research prevents funds from pouring into markets at the end of a bull market or bottom fishing when a bear market begins.

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$1.8 billion Shanghai Chongyang Investment Management, another hedge fund, twice reduced exposure to equities to about 60% of assets in the first quarter, partially avoiding the panic selling that has been unleashed during the country’s strict COVID-19 lockdowns China followed.

Partial or full lockdowns were imposed in key centers across the country, including the most populous city of Shanghai, from March to May, and temporary lockdowns are still in place in some areas to contain outbreaks.

“We turned cautious in February, taking advantage of a sharp market rally window in late March to further reduce our positions,” said Wang Qing, chairman of Shanghai Chongyang.

The market did not fully price in the downside risks to economic growth and corporate earnings at the time, Wang said.

China’s economy slumped in the second quarter as lockdowns hit consumption and factory production, but optimism is growing that pandemic restrictions will be eased.

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Chongyang has decided the fourth quarter is the time to turn positive and has started adding some technology and consumer stocks to its portfolio in recent months.

Its yuan-denominated Chongyang I fund fell 1.4%, while an offshore US dollar product, the Chongyang Dynamic Value Fund, fell 8.6% by the end of August.

Wang believes market sentiment will improve in three months and expects China to ease COVID-19 restrictions after October’s Communist Party Congress, by which time US inflation should be down 4-5 months.

However, the Golden Nest Tao will remain cautious until next March, when China outlines its economic policy direction during the “Two Sessions” – meetings of the top decision-making bodies, the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC).

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Edited by Vidya Ranganathan and Jacqueline Wong

Our standards: The Thomson Reuters Trust Principles.

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