Hedge funds use macro rates to control the market | Paragon Alpha | Paragon Alpha

Hedge funds use macro bets to manage the uncertain Chinese market

By Matea Gucec

The hedge funds that have so far this year survived and outperformed China's choppy stock markets attribute their success to their bets on broad macroeconomic developments.

The $230 million Golden Nest Greater China Fund, managed by Stanley Tao, is one such fund. Internal estimates indicate that the hedge fund had a 2.4% net return for September and a 1.2% loss for the first nine months.

That contrasts with the almost 30% fall in MSCI China for the nine months leading up to September, which was the worst start to a year since 2008. The Shanghai Composite Index dropped 5.5% in September alone while losing 16% over the same time period.

According to Tao, founder and CIO of Golden Nest Capital Management, the fund was able to navigate the severe headwinds thanks to extreme risk aversion and negative bets on the internet, real estate, and healthcare sectors.

Tao claimed that after monitoring regulatory developments, external risks from an audit dispute with U.S. regulators, and realizing that the Chinese government was steadfast about stopping a "disorderly expansion of capital" at technology firms, his fund started reducing its exposure to technology stocks and turned bearish in late 2020.

According to Eurekahedge data from With Intelligence, China-focused long-short equity funds were down 13.5% by the end of August, in stark contrast to a 1.1% gain by China macro managers.

The biggest winners this year are macro strategies, with hedge funds capitalizing on the volatility created by the varying rates of rate rises around the world and regulatory changes. They took advantage of possibilities that did not exist during a decade of universally soft monetary policy. Top-down research is also a critical component of success or failure for stock pickers.

$1,8 billion Another hedge fund, Shanghai Chongyang Investment Management, decreased its exposure to equities twice in the first quarter, bringing its stock exposure down to around 60% of assets, partially preventing the panic selling that occurred during China's strict COVID-19 lockdowns.

From March to May, major cities across the nation, including Shanghai, the most populated metropolis, went into partial or total lockdowns. Snap lockdowns are still in place in some places to contain outbreaks.

According to Wang Qing, chairman at Shanghai Chongyang, the market at the time did not adequately reflect the dangers to company profitability and economic growth.

The second quarter saw a severe slowdown in China's economy as lockdowns reduced consumer spending and manufacturing output, but there is growing hope that the limits imposed by the pandemic may loosen.

In the past few months, Chongyang has begun to add certain tech and consumer stocks to its portfolio after deciding that the fourth quarter is the ideal moment to turn things around.

Its Chongyang I fund, which is priced in yuan, fell 1.4%, while the Chongyang Dynamic Value Fund, which is denominated in dollars and is offered overseas, fell 8.6% by the end of August.

Assuming China will relax COVID-19 limitations following the October Communist Party Congress, Wang predicts that the market mood will improve in three months. By that time, U.S. inflation should have declined for four to five months.

Tao of Golden Nest will, however, exercise caution until next March, when China announces its direction for its economic policy at the "Two Sessions"—meetings of the two most important decision-making bodies, the National People's Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC)—which will take place (CPPCC).


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