Hedge Funds Shift Focus from China to U.S. Equities

By Summer Zhen
HONG KONG (Reuters)

Global hedge funds have shifted their investments dramatically in October, pulling out of China and emerging market shares while increasing their holdings in U.S. equities in anticipation of the upcoming U.S. election, according to Goldman Sachs.

After a significant 20% surge in Chinese stock markets last month, driven by various stimulus measures, there has been a notable outflow this month. Goldman's prime brokerage team observes that timely data on foreign flows into mainland China is no longer available, complicating the assessment of market trends.

As of October 23, Goldman Sachs estimates that hedge funds have reversed nearly 80% of the previous cumulative investment peak in Chinese equities. The net selling this month is on track to be among the largest recorded in recent history, primarily led by Chinese stocks.

Investor sentiment has waned as Chinese markets have receded from their highs, mainly due to vague details regarding the government's stimulus commitments and increasing tariff concerns linked to a potential Donald Trump presidency.

Hedge funds have also divested from other emerging markets like India, Taiwan, South Korea, and regions in Latin America. The MSCI China index has lost 4% this month following a robust 23% rise in September, its best performance in nearly two years. Similarly, the MSCI Emerging Markets Index has dropped 3% thus far in October, contrasting with a 6.5% gain the previous month.

Hedge funds have shifted back to U.S. equities for the first time in six months, driven by strong job data and corporate earnings that mitigate recession fears. In light of increased volatility expected from the close U.S. presidential race, hedge funds have also reduced leverage levels recently, with stock-picking funds nearing their lowest gross leverage levels in a year, indicating a more cautious investment approach.

On average, global stock-picking hedge funds have gained 0.6% in October and 11.9% year-to-date, whereas systematic long/short equity funds have seen a decline of 0.9% in October but are up 18.7% for the year.