Hedge Funds Reduce Chinese Stock Exposure Since Late September, Says Goldman...

TMTPOST -- Global hedge funds have significantly scaled back their exposure to Chinese and other emerging market stocks, opting instead to increase their positions in U.S. equities amid October’s market rotation ahead of the U.S. election, according to Goldman Sachs.

In a recent note, Goldman Sachs’ prime brokerage team estimated that hedge funds had reversed nearly 80% of their peak cumulative buying in Chinese equities as of October 23. “This month’s net selling in emerging markets is on track to be among the largest on record, led by sales of Chinese equities,” the firm stated.

The pullback from China comes as investors express concern over a lack of details regarding Beijing’s anticipated stimulus measures, as well as potential tariff risks associated with a Donald Trump presidency. Other emerging markets, including India, Taiwan, South Korea, and Latin America, also experienced selloffs from hedge funds in October, according to Goldman Sachs.

The MSCI China Index declined by 4% in October, following a strong 23% rally in September—its best monthly performance in nearly two years. Meanwhile, the MSCI Emerging Markets Index has fallen 3% this month, following a 6.5% rise in September.

In contrast, hedge funds have redirected their focus toward U.S. equities for the first time in six months, driven by positive economic indicators, including strong employment data and corporate earnings that have helped temper recession fears.

Goldman Sachs noted that hedge funds have taken a more cautious approach amid increased volatility, spurred by the close U.S. presidential race. As a result, many have reduced leverage levels in October, with equity-focused funds operating near 12-month lows in gross leverage—a signal of increased caution.

On average, global stock-picking hedge funds have gained 0.6% in October and are up 11.9% year-to-date. Systematic equities long/short funds, however, have declined by 0.9% this month but maintain an 18.7% increase for the year.

China, which saw a 20% market surge last month driven by a series of stimulus policies, is now experiencing substantial outflows. However, recent changes mean the country no longer publishes timely data on foreign investments in its mainland markets, Goldman Sachs noted.