Hedge funds have exhibited a significant surge in interest in Chinese stocks, executing the most significant buying spree in over five years over three days last week.
According to a client note by Goldman Sachs seen by Reuters, this surge of activity occurred between January 23 and 25, marking a notable shift in hedge fund sentiment towards the Chinese market.
Previously, hedge funds had been predominantly bearish on Chinese stocks, maintaining a mostly negative outlook for eight out of the past ten weeks.
However, this trend reversed dramatically last week, with many hedge funds adopting outright long positions, betting on a rise in stock prices, rather than merely closing their short positions.
The renewed interest in Chinese equities aligns with Beijing's intensified efforts to boost confidence in its economy, which has been struggling due to a property sector crisis and sluggish growth.
Hedge funds gravitated mainly towards U.S.-listed shares of overseas companies, or American Depository Receipts (ADRs), as a primary method of investing in Chinese stocks. This preference was followed by investments in mainland A-shares and Hong Kong-listed Chinese companies, known as H-shares.
The move towards Chinese equities is part of a broader trend in Asian emerging markets, which have seen their most significant net buying activity in over five years.
Within this context, China emerged as the most net-bought market in the week ending January 25, surpassing both Taiwan and India.
The week leading up to January 25 witnessed an unprecedented influx of nearly $12 billion into Chinese equity funds, the largest since 2015 and the second-largest in history, according to Goldman Sachs and Bank of America.
This influx was primarily through domestic exchange-traded funds (ETFs) in China.
Despite this recent surge in interest, overall positioning in Chinese equities remains cautious, at five-year lows across both hedge funds and mutual funds.
As of the end of December, mutual fund historical holdings showed a 5.5% allocation to China, the lowest in a decade. Nevertheless, Goldman Sachs maintains a "constructive" stance on Chinese equities.