(Bloomberg) — China’s stimulus blitz handed more than 25% returns in September to some hedge funds as the nation’s stocks surged, according to people with knowledge of the matter.
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Triata Capital’s China fund soared 44% last month, while that of Blue Creek made an estimated 31% gain and Yunqi Capital’s jumped 26%, the people said, asking not to be named discussing private information. Some funds wiped out earlier losses for the year. The MSCI China Index advanced 23% in September, the most since November 2022.
Beijing unleashed a range of measures last week to bolster an ailing economy, including cutting banks’ reserve requirements and allowing millions of households to renegotiate lower rates on as much as $5.3 trillion of existing mortgages. The stimulus spurred a strong recovery in Chinese stocks, bringing much-needed relief to hedge funds focused on China, which until August looked on track for a third straight year in the red, according to Eurekahedge Pte data.
Billionaire investor David Tepper said he was buying more of “everything” related to China while hedge funds scrambled to build positions to benefit from the equities rally. The initial market rebound favored hedge funds whose bullish wagers on China far outweighed their bearish calls, benefiting from a reversal in market sentiment. There is optimism that savvy stock picking may lead to market-beating returns, known as alpha, later.
Goldman Sachs Group Inc.’s hedge fund clients made their heaviest weekly net buying of Chinese equities since its prime brokerage unit started to track such data in 2016. Its China-focused fundamental stock picking hedge fund clients returned 6% on average last week, the best weekly performance on record, the bank said in a Sept. 30 note.
“September’s sudden policy pivot showered China funds with very welcome outsized beta-driven returns,” said Nicolas Amstutz, a Singapore-based partner at Lotus Peak Capital, which provides research on Asian hedge funds to investors. “We view the environment going forward as conducive to alpha-focused strategies in China. The rising tide only lifts all boats in the initial move.”
Triata, led by Shenzhen-based Sean Ho, oversees about $770 million in assets. Over the past two years, the fund bought stocks it considered as having strong fundamentals, high revenue and profit growth, attractive buyback and dividend policies, and with large cash balances yet trading at distressed valuations, said a person with knowledge of its technology and consumers-focused fund.
The fund saw particularly strong gains in the second half of September from stocks linked to artificial intelligence software and data centers.
Yunqi, founded by investor Chris Wang, had bought heavily into sold-off US-listed Chinese companies, which have been boosting dividends and engaging with investors to improve share prices, another person said. One of those stocks, Lufax Holding Ltd., has soared 62% in US trading since Sept. 20, while another, Qifu Technology Inc., jumped 20% during the same period.
Representatives from Triata and Yunqi declined to comment.
The equity rally helped erase Blue Creek’s earlier losses at its China fund, putting its gains this year at 15%. The $133 million hedge fund has been bullish on the China market in the past year and plans to remain fully invested, said founder Joseph Zhang Xiaogang.
“The valuation in China’s market is still very cheap,” Zhang said. “The negative bias against China and its economy is so deep and it takes some time for global investors to change their bias.” There are more policies in the Chinese government’s toolbox to support its economy with the nation gripped by a cyclical slowdown driven by a weak property market, he added.
Another hedge fund, Pinpoint China Fund, made a nearly 12% return in September, extending this year’s gain to 18%, according to people with knowledge of its performance.
Not everyone saw outsized gains. More than 95% of the stocks in the 597-member MSCI China Index gained in September, squeezing managers’ short positions. There is a sense that the best days of funds that more tightly balance their bullish and bearish wagers have yet to come.
The $310 million UBS O’Connor China Long/Short Alpha Strategies UCITS fund was up 3.4% in September, taking this year’s advance to 17%, according to data compiled by Bloomberg.
“The Chinese government’s recent announcement of stimulus support measures have given the China market a much-needed boost in confidence and a signal of the government’s commitment to supporting growth,” Tan Jia, head of China research at UBS O’Connor, said in an email, declining to comment on fund details.
More importantly, the country has made progress since early 2021 in reducing risks in its property and financial industries, boosting manufacturing and export competitiveness and putting more focus on addressing structural issues. “However, the market is still volatile and an alpha, relative-value approach is recommended for investing,” Tan said.
UBS O’Connor is still closely monitoring high-frequency data, such as property sales and average selling prices, car sales, cement shipment and hotel revenue per available room, he added.
WT China Fund, which oversaw nearly $1.4 billion as of June, rose 1.7% for the month, the people familiar with its performance said. For the year, it has gained 21%.
Pinpoint and WT China Fund did not immediately reply to emails seeking comment.
APS Asset Management’s long-only China fund with about $1.5 billion surged 20% in September while its hedge fund, which manages around $200 million, was up 2% for the month.
China also contributed about half of the 3.1% increase in September of the Dymon Asia Multi-Strategy Fund, putting its nine-month gain to 13%, according to estimates from the Singapore-based firm.
It’s too early to say whether the September rebound may be another of the many false rallies since the Chinese bear market began in early 2022, Zhao Chen, chief global strategist of Montreal-based investment research firm Alpine Macro, wrote in a Monday note.
Still, he pointed out that equity forward earnings of Chinese stocks in the MSCI Inc. indexes have stopped falling amid a raft of share buybacks and profit recovery in very competitive industries. A lot of the bad news has also been factored in, with Chinese stocks trading at a 60% discount to US peers and 40% to European equities.
“Of course, there is nothing guaranteeing that improving profit and cheap valuations will necessarily lead to an immediate outperformance in Chinese stocks,” Zhao said, citing a changed world rife with geopolitical tensions. “All we can say is that Chinese equities may represent a value play over the longer run.”
(Updates with UBS O’Connor China, Dymon and APS returns from 15th paragraph.)
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