Hedge fund managers have been ramping up their stakes in Chinese stocks, betting on potential gains from a U.S.-China trade deal or global pushback against U.S. President Donald Trump's policies.

According to a Morgan Stanley (NYSE: MS ) prime brokerage note, hedge funds now hold the highest levels of Chinese stocks in a year, though allocations remain low by historical standards. The U.S. hedge fund community, which makes up a major part of the industry, currently allocates around 3% of its portfolios to China.

In contrast, during the week leading up to February 14, global hedge funds directed about 60% of their trading flows to the United States, as per a Goldman note. This preference is partly due to the relatively robust U.S. economy and the anticipation of deregulation and tax cuts under the Trump administration. However, China's ongoing real estate crisis and high debt levels have made hedge funds cautious about investing heavily in the world's second-largest economy.

Despite this caution, some U.S. hedge funds have re-entered the Chinese stock market, attracted by the sharp rally in stocks since September, which was fueled by economic stimulus hopes. Chinese stocks ended 2024 with their first annual gain since 2020.

David Aspell, a portfolio manager at Mount Lucas, has taken positions in China through call options and exposure to index funds and single stocks. Aspell is optimistic that tariff tensions will ease, as he believes Trump wants a trade deal that benefits the U.S.

Boaz Weinstein of Saba Capital Management has pointed out that some Chinese tech stocks are undervalued and profitable, with strong market positions. Meanwhile, Jon Withaar of Pictet Asset Management has added some Chinese stocks to his portfolio but has also bought put options as a hedge against potential declines, citing concerns about the recent tech-driven rally's composition and speed.

The interest in Chinese AI development has been persistent, with Fang Zheng of Keywise Capital stating that AI is a mega trend that will continue regardless of the trade war's outcome. Bridgewater Associates’ co-CIO Karen Karniol-Tambour has suggested that geographic diversification in investments, with a preference for China, could be rewarding due to the increasing global fragmentation and mercantilist policies.

BNP Paribas (OTC: BNPQY )' 2025 Hedge Fund Outlook indicates a shift in investor sentiment, with 7% of those surveyed looking to add China exposure, contrasting with the capital withdrawal seen in 2024 and 2023. This shift underscores a growing interest in Chinese assets among global investors.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.