By Summer Zhen
Hong Kong (Reuters) - Hedge funds that bet on a swift shift in the country's zero-COVID and regulatory policies in late 2022 while the stock market was tumbling and political uncertainty was intense were rewarded handsomely, according to sources and fund documents.
The MSCI China index plunged by 17% in October as President Xi Jinping consolidated power in a twice-in-a-decade Communist Party Congress and many investors worried Beijing would sacrifice economic growth for ideology.
The hedge funds that used that as a buying opportunity profited, with tourism and consumption stocks quickly rebounding after Beijing adopted a more targeted COVID-19 policies and reduced quarantines following widespread anti-lockdown protests.
The MSCI China index rose by 36% over November and December, even as a surge in case numbers cast doubt over the economic recovery in the short term.
Greenwoods Asset Management, one of Asia's largest hedge funds which manages nearly $20 billion, saw its flagship Golden China Fund rally by 45% in the final two months of 2022, having bought weakened consumer and tech stocks in early November, two sources familiar with the matter said.
The Hong Kong-based firm, managed by veteran investor George Jiang, raising net exposure in the fund to more than 80% in November, up from less than 50% in October, betting long on signals from the Congress that economic development would be a priority and policy changes on COVID and real estate could come sooner than expected.
"The medium to long-term risk reward looks very favourable for investing in fundamentally sound Chinese companies, especially in offshore markets, due to the low valuations and likelihood that 2022 will be a low base," Greenwoods said in a newsletter sent to investors in November seen by Reuters.
Greenwoods declined to comment.
Wang Qing, chairman of Shanghai Chongyang Investment Management, said understanding China's political cycles was crucial and the conclusion of the Party Congress marked a turning point for bolstering the economy and optimising COVID measures.
Chongyang, which manages $1.8 billion, turned bullish in the fourth quarter, fishing for cheap Hong Kong-listed companies and increasing the net exposure of its portfolios to more than 90%, Wang said. Its U.S. dollar-denominated Dynamic Value Fund jumped 21% in November, 5% in December and a further 9% in the first two weeks of January.
"We had a high conviction as we believed the situation three months later must be better than it was then, and the market was overly pessimistic," Wang said.
Golden Pine Asset Management saw a 23% rally over the months of November and December in its flagship Golden Pine Fund through maintaining or even adding exposure to real estate shares and China ADRs as they were sold off, according to sources familiar with the matter. The strategy, managed by chief investment officer Peng She, made a 20% net return in 2022.
Golden Pine did not respond to request for comment.
For 2023, hedge fund managers said they were even more bullish about China, expecting traditional valuation metrics to return to focus after a year driven by macro events.
"China will likely lead the world in terms of economic growth this year, with more opportunities stemming from the recovery of corporate earnings," Golden Pine's She said during an investor seminar last week. "We expect to see a return of foreign investor capital to the region this year."