- US hedge funds have been burned by China's regulatory crackdown in recent months, according to Goldman Sachs.
- The bank found that Chinese stocks were the most popular ever among hedge funds at the start of the third quarter.
- The average China ADR has declined by more than 50% since February, according to Goldman.
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US hedge funds seem to have been caught off-guard by China's regulatory crackdown and the ensuing sell-off in Chinese stocks like Alibaba, Tencent, and JD.com.
According to a Thursday note from Goldman Sachs, recent underperformance by US hedge funds has in part been driven by their exposure to Chinese stocks.
"One third of hedge funds in our analysis held a China ADR in their long portfolio at the start of 3Q, contributing to the recent headwinds against hedge fund returns," Goldman explained. The bank analysed 813 hedge funds with nearly $3 trillion in gross equity positions at the start of July.
Chinese stocks have seen accelerating declines as companies across all sectors face increased regulatory scrutiny from Beijing. From tech giants like Alibaba and Tencent, to small education tutoring companies based in China, the stock losses have been large.
The regulatory crackdown started late last year after Alibaba's Jack Ma made critical comments against several institutions in China, which ultimately led to the withdrawal of Ant Group's highly anticipated IPO. But the losses in Chinese stock prices didn't accelerate until this year. The average China ADR has decline by more than 50% since February, according to Goldman.
Chinese stocks most popular with hedge funds include Alibaba, which ranked seven, as well as JD.com, Baidu, Didi, and Bilibili.
"At the start of the third quarter, 33% of hedge funds in our sample held long exposure to China ADRs, suggesting funds were generally unprepared for the recent regulatory tightening," Goldman Sachs said.
US hedge funds aren't the only ones losing money on Chinese stocks. China's richest tech titans have seen $87 billion of personal wealth destroyed amid the government crackdown on different industries.