Are Hedge Funds Losing Interest in China?

Much has been discussed of the ailments affecting the Chinese economy and its stock markets. However, major China ETFs like the iShares FTSE/Xinhua China 25 Index (ETF) (NYSEARCA:FXI), the iShares MSCI China Index Fund (NASDAQ:MCHI), and the SPDR S&P China (ETF) (NYSEARCA:GXC) have gained 7.78%, 7.55% and 7.29% year-to-date, respectively, outperforming the S&P 500, which has returned 4.76%.

Having said this, the KraneShares Trust (NASDAQ:KWEB), an ETF focused on the Chinese internet sector, has been much more volatile, in addition to posting gains of only 3.63% this year. In this article, we’ll take a look into some of the most popular Chinese stocks among the hedge funds that we track and see how they traded them during the second quarter.

At Insider Monkey, we track around 750 hedge funds and other institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on, can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see the details here).

#5. 58.com Inc (ADR) (NYSE:WUBA)

– Number of Hedge Fund Shareholders (as of June 30): 29

– Total Value of Hedge Funds’ Holdings (as of June 30): $916.18 million

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 14.1%

Shares of 58.com Inc (ADR) (NYSE:WUBA) have lost almost 30% year-to-date. Over the second quarter alone, they plummeted by roughly 16.8%, opening attractive entry points for investors along the way. Consequently, the number of funds in our database long the operator of online classifieds and listings platforms rose by 7.4% to 29. Among them were Lei Zhang‘s Hillhouse Capital Management, which boosted the size of its holding by 179% to 3.71 million shares, and Daniel S. Och’s OZ Management, which held 3.62 million shares on June 30.

58.com Inc (ADR) (NYSE:WUBA) has experienced plenty of volatility in the third quarter, but is up by more than 1%, which included recent help from a Wall Street Journal article about the increase in venture capital investment in China. On the other hand, shares tumbled in mid-August after the company reported second quarter revenue of $297.82 million, $5.6 million below the Street’s consensus, though its $0.26 earnings beat thanks to EPS of $0.15 was impressive.

#4. Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)

– Number of Hedge Fund Shareholders (as of June 30): 43

– Total Value of Hedge Funds’ Holdings (as of June 30): $2.2 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 14.4%

Unlike its peer above, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) witnessed a 35.8% reduction in hedge fund support during the second quarter, as its stock tumbled by almost 8.5%. Funds that left the company included Israel Englander’s Millennium Management, which held 1.86 million shares on Mach 31, and Steve Cohen’s Point72 Asset Management, which disposed of its half-a-million shares between April and June. Since the second quarter ended, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) has gained 8.7%, with the company’s second quarter results proving to be a key driver of bullish sentiment. Revenue of $664 million, up by 62.9% year-over-year, was in-line with expectations, while a net loss of $0.17 per share was $0.02 smaller than anticipated.

We’ll see how hedge funds felt about their three favorite Chinese stocks during the second quarter on the next page.

#3. JD.Com Inc(ADR) (NASDAQ:JD)

– Number of Hedge Fund Shareholders (as of June 30): 51

– Total Value of Hedge Funds’ Holdings (as of June 30): $6.66 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 34.6%

Over the second quarter of 2016, the number of hedge funds in our database long JD.Com Inc(ADR) (NASDAQ:JD) tumbled by more than 30%, as the stock lost more than 22% of its value. However, the hedge funds that we track remained overweight the stock, owning more than one-third of its float. Some funds that remained bullish on the company were Andreas Halvorsen’s Viking Global, which disclosed ownership of 22.49 million shares as of June 30, and Philippe Laffont’s Coatue Management, with 19.69 million shares.

Since the second quarter ended, shares of JD.Com Inc(ADR) (NASDAQ:JD) have jumped by almost 30%, largely driven by strong second quarter results. Revenue rose by 42% year-over-year, to approximately $9.8 billion, with revenue from services and other businesses up by 67% to $832.25 million. Gross profit also rose by 66% to $1.4 billion, while annual active customer accounts spiked by 65% to 188.1 million.

#2. Baidu Inc (ADR) (NASDAQ:BIDU)

– Number of Hedge Fund Shareholders (as of June 30): 56

– Total Value of Hedge Funds’ Holdings (as of June 30): $3.43 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 7.6%

Much like its peers above, Baidu Inc (ADR) (NASDAQ:BIDU) the number of hedge fund supporters of Baidu declined during the second quarter, by 22%. Still, as 56 shareholders in our system held the stock, it was one of the most popular Chinese stocks among hedge funds and one of the 100-most widely held stocks overall. Among those bearish was Dmitry Balyasny’s Balyasny Asset Management, which sold all of its 272,090 Baidu shares as well as its 400,000 call options underlying Baidu shares during the second quarter. Among those bullish was Harris Associates, which held 5.26 million shares worth $869.7 million as of June 30.

Baidu Inc (ADR) (NASDAQ:BIDU) has been pretty volatile this year, but gained 12% in the third quarter. Most recently, shares spiked after the company’s CEO appeared on CNBC to talk about the Chinese economy, the internet, and innovation, among other things. Discussing the dominance of U.S. internet companies in Europe, Robin Li said, “I think European countries are frustrated that they don’t have enough number of choices. That actually creates opportunities for companies like us.”

#1. Alibaba Group Holding Ltd (NYSE:BABA)

– Number of Hedge Fund Shareholders (as of June 30): 69

– Total Value of Hedge Funds’ Holdings (as of June 30): $5.51 billion

– Hedge Funds’ Holdings as Percent of Float (as of June 30): 2.8%

Lastly is Alibaba Group Holding Ltd (NYSE:BABA), one of the few major Chinese stocks to rise in popularity among the hedge funds that we track during the second quarter, with the number of funds holding its shares rising by two to 69. Bulls included Silver Lake Partners, with 16.36 million shares on June 30, and Ken Fisher’s Fisher Asset Management, with 3.22 million shares.

Alibaba Group Holding Ltd (NYSE:BABA)’s stock recently broke the $100 threshold after more than 550 days trading below that mark. Last week, shares spiked after Jim Cramer mentioned the company among those “in the sweet spot of good growth, low expectations.” In his show, the expert prepared investors for “the impending gloom of a rate hike and slowing economy, by highlighting plays that could work in a changing world.”

Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned in this article.