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Hedge Funds Reduce China Stock Holdings During Fourth Consecutive Week Amid Fading DeepSeek Optimism

Global hedge funds have continued to divest from Chinese equities for a fourth consecutive week, following a downturn in enthusiasm for Chinese tech stocks sparked by low-cost artificial intelligence startup DeepSeek, as per a report from Goldman Sachs.

The report, dated March 7 and reviewed by Reuters on Monday, disclosed that during the week spanning from February 28 to March 6, funds increased their short positions while reducing their long positions.

Goldman Sachs prime brokerage noted that hedge funds have "reversed course" since mid-February after a period of heightened interest, particularly in DeepSeek, where China experienced significant hedge fund investments globally up to February 17.

Currently, flows for the year-to-date have stabilized, with Goldman Sachs approximating them to be flat.

The surge of interest in tech, driven by DeepSeek’s Wall Street Magnificent Seven-led AI trade in January, saw investors flocking to Chinese tech companies and potential AI beneficiaries, leveraging the broader AI adoption trend in China.

Despite the positive momentum, the report anticipates the possibility of profit-taking following the impressive 30% rise in Chinese equities since the mid-January low, as noted by Timothy Moe, chief Asia Pacific strategist at Goldman Sachs.

Following the week up to March 6, hedge funds were reported to have sold positions across all regions, with notable divestment in North America and Asian emerging markets.

Analysts caution that the recent data, reflecting sluggishness in China's trade growth and mounting pressures, could hinder short-term momentum and sway investor sentiment towards Chinese assets, albeit hedge fund positions in China are relatively modest.

According to Goldman Sachs, the net allocation of hedge funds to Chinese equities, covering both onshore and offshore markets, stands at approximately 8.2%, placing it in the 37th percentile over the past five years.