In a significant shift in investment strategy, global hedge funds have begun selling off Chinese and broader emerging market shares while reallocating capital into U.S. equities, as reported by Goldman Sachs. This rotation comes in October, just ahead of the U.S. elections.
After a remarkable 20% surge in Chinese stock markets last month, fueled by various stimulus measures, these markets have now experienced substantial outflows, according to Goldman’s prime brokerage team. Notably, China has ceased publishing timely data on foreign investments in its mainland market, complicating the assessment of foreign capital flows.
Goldman Sachs estimates that hedge funds have recouped nearly 80% of their peak cumulative investments in Chinese equities as of October 23. The firm noted, “This month’s net selling in emerging markets is poised to be among the largest we have recorded, primarily driven by divestments in Chinese stocks.”
This withdrawal coincides with a broader pullback in China’s markets, which have disappointed investors seeking more concrete details on the government’s stimulus commitments. Furthermore, the looming possibility of a Donald Trump presidency raises concerns over potential tariff increases.
Hedge funds have also sold off shares in other emerging markets, including India, Taiwan, South Korea, and several Latin American countries, according to Goldman Sachs.
The MSCI China index has dropped 4% in October, following a remarkable 23% increase in September—the best monthly performance in 22 months. Similarly, the MSCI Emerging Markets Index has fallen by 3% this month, compared to a 6.5% gain in September.
Conversely, hedge funds have turned their focus back to U.S. equities for the first time in six months, driven by strong job data and solid corporate earnings that have mitigated recession concerns.
In response to the rising volatility linked to the contentious U.S. presidential race, Goldman Sachs noted that hedge funds have decreased their leverage in the past week and throughout October. Specifically, stock-picking funds have seen their gross leverage levels approach 12-month lows, indicating a more cautious investment posture.
On average, global stock-picking hedge funds have reported a 0.6% gain in October and an 11.9% increase year-to-date. In contrast, systematic equities long/short funds have experienced a 0.9% decline this month but remain up 18.7% for the year.
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