Hedge funds exposure to Chinese stocks at the lowest in five years: GS

Global hedge funds have reduced their exposure to Chinese equities to the lowest level in five years while significantly increasing their investments in Japan, Reuters reported Thursday, citing a Goldman Sachs report.

The marked adjustment underlines investors' profound concerns about China's economy. Chinese shares are nearly flat for the year, as initial optimism for a market rally waned due to disappointment with policy measures aimed at reviving the sluggish economy.

Goldman Sachs' prime services team highlighted that China led the sell-off in emerging markets stocks last month, with mainland A-shares accounting for the bulk of outflows.

As a result, hedge funds' net allocation to China, encompassing both onshore and offshore Chinese equities, dropped to a five-year low. In contrast, allocations to Japan reached their highest levels in four years by the end of July.

"Divergence between net allocation in Japan and China continues to widen," Goldman Sachs noted. As China faces mounting deflationary pressures and Japan raises rates after years of deflation, hedge funds are increasingly turning to the Japanese market for growth opportunities.

Japan's benchmark index Nikkei has risen 17% so far this year.

China, the world's second-largest economy, grew by 4.7% in the second quarter, marking its slowest growth since the first quarter of 2023.

Analysts pointed out that recent surprise rate cuts and policy guidance from the Communist Party's Third Plenum did little to alleviate concerns about domestic demand or improve sentiment.

By the end of July, global hedge funds had roughly 6.6% of their portfolios allocated to Chinese equities, a significant drop from a peak of 15% in mid-2020, according to Goldman’s note.

China-focused long-short equity funds witnessed their worst month in over two years, losing an average of 5.8% by July 29. In comparison, broader pan-Asia long-short equity funds declined by 3.5%, while Japan-focused funds gained 1.2%.