China-focused hedge funds post explosive September returns

Some China-focused hedge funds are reporting explosive returns in September, thanks to a sharp rebound in Chinese stocks driven by Beijing's aggressive stimulus package.

The surge in stocks, which fuelled a 25% record jump over five days last week in China's blue-chip CSI 300 Index catapulted Asian equity hedge funds to top performers globally for the year so far.

Hong Kong's Triata Capital posted a return of as much as 44% last month, taking its Jan-Sept performance to 56%. The $770 million China-focused fund held long-term investments in data centres, internet giants, e-commerce and travel firms, and those investments bore fruit.

"Great companies were trading at very discounted valuation," Sean Ho, chief investment officer of Triata Capital said in a September investor letter.

Yunqi Capital's China Fund gained 26% before fees in September. The fund said its bets on beaten-down U.S.-listed Chinese internet and fintech companies such as Lufax holdings and Qifu technology paid off. The fund also picked companies that were increasing buybacks and dividend payouts.

The bounce in Chinese stocks comes after three years of shares being beaten down. Authorities launched their largest post-pandemic stimulus, including interest rate cuts and a $114 billion war chest to boost share prices, last week.

The MSCI China index rose 24% in September, its biggest monthly gain since November 2022.

The turnaround is a respite for Chinese funds that had been suffering since the COVID-19 pandemic due to a sluggish economy and geopolitical tensions. Analysts believe overseas money will come back to Chinese funds if the rally is sustained and the economy recovers.

Goldman Sachs estimates China-focused stock-picking hedge funds returned 6% between Sept 23-27, their best weekly performance on record. So far this year, broader Asian equity hedge funds have gained 12%, leading the pace of gains globally.

Funds in Asia with lower net long positions on China underperformed last month.

Singapore-based Keystone Investors, which adopts a low-net strategy by making long and short bets on about 100 companies, lost 4.8% for September, narrowing its year-to-date gains to 13.2%, according to a source familiar with its performance.

Keystone declined to comment.

Short-sellers on offshore Chinese stocks could have incurred a loss of $6.9 billion in the last two weeks of September, financial analytics firm S3 Partners estimates.

Steven Luk, chief executive of FountainCap Research & Investment, said the stimulus package is comparable to the 4 trillion yuan program China unveiled during the 2008 Global Financial Crisis, which set off a multi-year rally in stocks.

FountainCap's long-only China fund jumped 19% last month.

Don Steinbrugge, founder of Agecroft Partners, a hedge fund consulting firm, said hedge fund strategies focused on China will return over time, depending on how and when the Chinese government stabilises the property market and economy.

"However, we don't expect this increase in demand to take place until early/mid 2025," he said.

Hedge funds performance:

Sources: Investors and funds
*Yunqi performance is gross of fees