Global hedge funds have continued to reduce their exposure to Chinese equities for the fourth week in a row, as the initial excitement surrounding low-cost AI startup DeepSeek fades, according to a note from Goldman Sachs. The investment bank, dated March 7, revealed that funds were increasing their short positions while cutting long bets on Chinese stocks between February 28 and March 6.
Goldman Sachs noted that hedge funds had reversed their position on China equities since mid-February, following a surge of optimism earlier in the year. The trend had been fueled by the rise of DeepSeek, which sparked renewed interest in Chinese tech companies, particularly those viewed as potential beneficiaries of the growing AI market in China.
Prior to mid-February, China had seen the largest inflows of hedge fund capital globally, driven by the emergence of DeepSeek. However, Goldman Sachs estimates that these flows have now stabilized, with year-to-date investment remaining flat.
In January, DeepSeek’s entry into the market disrupted the AI trade traditionally dominated by Wall Street’s “Magnificent Seven” tech giants, prompting investors to pour money into Chinese tech firms poised to capitalize on AI adoption in the world’s second-largest economy. Alongside this, there was a belief that Chinese stocks, which were trading at a discount, would experience a catch-up rally.
This optimism drove the Hang Seng Index to an impressive 13% gain in February, outperforming major global markets. The broader MSCI China Index also rose by 12% in February, continuing its upward momentum with an additional 6% increase in March.
Despite this, Goldman Sachs’ Asia-Pacific strategist, Timothy Moe, cautioned that profit-taking could occur following the 30% rally from mid-January lows, although the bank maintains a generally positive outlook on Chinese equities.
On a broader scale, Goldman Sachs reported that hedge funds had reduced positions across all regions in the week leading up to March 6, with North America and emerging Asia markets leading the sell-off.
Market analysts pointed out that slowing China trade growth and the increasing deflationary pressures reflected in the latest economic data could dampen short-term momentum and negatively affect investor sentiment toward Chinese assets.
Currently, hedge funds’ positions in Chinese equities remain relatively low, with Goldman Sachs estimating a net allocation of approximately 8.2%, placing it in the 37th percentile over the past five years.
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