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- Companies like Tiger Global, Sculptor and D1 have large stakes in major Chinese stocks.
- Hedge funds have underestimated the risks of investing in China, a geopolitical analyst told Insider.
- However, investors now understand why China is a risky bet.
Hedge funds with large positions in Chinese companies will likely be cautious after the regulatory environment rocked the markets over the past week.
The rout, sparked by China’s vow to survey the country’s largest companies listed on US stock exchanges, wiped out $ 400 billion in value from Chinese companies listed in the United States, which are mostly technology companies.
Some big name hedge funds held some of the biggest positions in Chinese tech titans at the end of the first quarter.
Tiger Global Management by billionaire Chase Coleman is a huge investor in China. The fund manager’s largest stake of $ 65 billion was JD.com, at the end of the first quarter, representing just under 10% of its public equity portfolio, according to the documents. Pinduoduo, an agricultural technology platform, was also among its top 10 holdings, and the manager had also wagered more than $ 1 billion on Alibaba, according to the documents. All three stocks have posted double-digit losses this year.
Tiger Global remains bullish on China despite the consequences of regulatory crackdown, according to reports. Bloomberg said the fund has the largest exposure to Sino-U.S. Certificates of deposit among major U.S. hedge funds. A company spokesperson declined to comment.
Other companies like Sculptor Capital Management had staked $ 350 million on Alibaba and D1 Capital Partners had a stake in JD.com worth more than $ 1 billion at the end of the first quarter. The sculptor and D1 declined to comment.
As some Chinese stocks have started to rebound, investors may rethink investing in China.
How hedge funds underestimated risk in China
China’s pledge to crack down on companies trying to go public in the United States comes after the United States passed a law, known as the Holding Foreign Companies Accountable Act. The law prohibits trading in foreign securities in the United States if a company does not participate in Public Company Accounting Oversight Board audits within the next three years.
China’s secular economic slowdown, combined with its antagonistic relationship with the United States, is shaking up financial markets, said Matt Gerken, geopolitical strategist at BCA Research.
Many hedge funds saw China as a great opportunity in the wake of Donald Trump’s presidency, as the United States had changed its tactics against China. Many hedge funds, he said, believed the United States was going to be more hawkish towards China.
“What they saw was that the United States was going to continue to trade with China and probably develop a more surgical policy, which meant you got rid of this major risk of sweeping tariffs that could destabilize the world economy. “
However, hedge funds have underestimated the risk in the country, Gerken said.
“The realization that is emerging among many investors, including hedge funds, is that China’s domestic politics are an inherent source of growing risk today,” Gerken added. “It was not motivated by pressure from the United States on China. In fact, things are happening in China that make it riskier to invest there.”
Short-selling activist Carson Block and founder of Muddy Waters Research believes President Xi Jinping has a head start and knows the United States will end up delisting companies in China in a few years.
Chinese regulators said this week that Chinese companies will be allowed to go public in the United States as long as they meet listing requirements. On Friday, the Securities and Exchange Commission said it would demand even more disclosures from Chinese companies seeking to register securities. In addition, President Gary Gensler has instructed his staff to “engage in additional targeted reviews of cases for companies with large operations based in China.”
“By the time the HFCAA goes into effect and authorizes or mandates delisting, there will certainly be no Chinese companies left to deregister,” Block told Insider recently. “I think that’s what Xi is trying to accomplish. He is warning companies that the IPOs in the United States are over, and you better start thinking about how you deregister from the United States. . ”
Bradley Saacks contributed reporting for this story.
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