Hedge funds cut back on investments in China amid ongoing regulatory measures

Hedge funds cut back on investments in China amid ongoing regulatory measures

Signage at Alibaba Group Holdings Limited head office in Hangzhou, China on Wednesday March 24, 2021.

Kilai Shen | Bloomberg | Getty Images

According to a new note from a Credit Suisse client, hedge fund exposure to Chinese stocks and indices listed in the United States has fallen to its lowest level in two years due to a sharp reduction in prices and the sale of positions.

The company posted a drop in so-called net risk – a way of showing its exposure to fluctuations in Chinese stocks – from 2% at the end of last year to around 0.75% as of Aug. 25.

Exhibition in China until August 25

Swiss credit

The move comes as hedge funds account for a third of ADRs at the end of the second quarter, according to a Goldman Sachs analysis of the latest 13F deposits from 813 funds. ADR stands for American Depository Receipt, which acts as a proxy for shares of foreign companies listed in the United States

Several regulatory measures brought down the average Chinese ADR. The Chinese government has largely focused its action on areas such as data security, for-profit education, and gaming. President Xi Jinping wants to encourage “shared prosperity” by closing the wealth gap in China.

The market is reacting to uncertainty about what this increased regulation means for the private sector. The Nasdaq Golden Dragon China ETF, which tracks US-listed companies that do most of their business in China, fell 1.6% in August, but fell more than 22% in July .

Credit Suisse says that “the sharp drop in net ADR 2021 risk is due to both lower prices and a reduction in the number of clients, with investors taking regulatory uncertainty into account.”

Dan Loeb of Third Point told investors he had withdrawn almost all of his exposure to China in recent months over fears that Xi “will continue to exercise his power in the financial markets,” The Wall Street Journal reported in an anonymous interview. Referring to the investor. Call.

Although not considered a hedge fund, Kathy Wood removed her exposure to China in late July through several of her Ark ETFs, some sold to Tencent, Baidu and JD.com, and more recently, more recently JD .com recovered. Tencent and Pinduoduo on the plunge.

The choice of specific stocks was important. During the month of August, Chinese crowdfunded shorts fell more than 4%, allowing managers to bet against names taking advantage of the drop. On the long side, the crowd was only down 0.2% for the long month.

Goldman said the recent massive sell-off of Chinese names hurt hedge fund returns. According to HFR, equity-oriented funds were in the red in July, posting losses of 0.76% on weighted average. Data shows this is the first monthly drop in nearly 10 months.

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