Hedge funds pulled out of Asian ADRs in March- Morgan Stanley

Investing.com-- American Depository Receipts for Asian firms, largely from Japan and China, saw net outflows through March despite clocking positive price action through the month, Morgan Stanley analysts said in a note.

Asian ADRs saw net outflows of $5.6 billion, Morgan Stanley said, with hedge funds leading this selling. Hedge fund outflows amounted to $7.2 billion during the month.

The outflows came even as the sector clocked a 5% month-on-month price gain, Morgan Stanley analysts said.

Asian hedge funds lead ADR outflows

Morgan Stanley analysts said that Asia-based hedge funds were leading the net selling in ADRs, and that a bulk of the selling came as hedge funds unwound positions built up earlier this year. U.S. and European funds did not participate much in ADRs. 

Quarter-to-date net inflows into Asian ADRs still remained strong at $15.7 billion. 

While overall short positioning on ADRs remained unchanged, investors were also seen adding new shorts on China and Japan, and more heavily on Hong Kong markets. 

“We do note that short interest on China H-shares has been picking up quickly over the last week, which we believe is a sign of sentiment cooling down from recent rallies,” Morgan Stanley analysts said. 

Hong Kong stocks saw a sharp melt-up through February amid growing optimism over an economic recovery in China. But this rally slowed through March, with the Hang Seng also reversing course in recent sessions as sentiment towards China soured.

ADR selling largely stock specific

Morgan Stanley analysts said that ADRs of Taiwan Semiconductor Manufacturing Corp (TW:2330) (NYSE:TSM), Japan’s Sumitomo Mitsui Financial Group Inc (NYSE:SMFG) (TYO:8316), India’s HDFC Bank (NYSE:HDB) (NS:HDBK), Singapore’s Sea Ltd (NYSE:SE) and China’s New Oriental Education And Tech Inc (HK:9901) (NYSE:EDU) saw the biggest outflows in March. 

TSMC by far saw the biggest outflows, after the chipmaker surged to record highs earlier in March, on hype over artificial intelligence. But this rally also showed some signs of reversal in recent sessions.

Short interest in Temu owner PDD Holdings Inc (NASDAQ:PDD), E-commerce giant Alibaba Group Holdings Ltd (NYSE:BABA) and Chinese videogame firm NetEase Inc (NASDAQ:NTES) was the highest amongst Asian ADRs in March. Fears of increased U.S. regulatory scrutiny against China, especially amid growing calls for a ban on social media app TikTok, soured investor appetite towards other Chinese firms.