Things were a lot brighter for Chinese stocks today, in particular for SouFun Holdings Limited (ADR) (NYSE:SFUN), JD.Com Inc (ADR) (NASDAQ:JD) and Vipshop Holdings Ltd – ADR (NYSE:VIPS) as they were all significantly up in Thursday’s trading session. SouFun Holdings Limited surged to a high of $7.98 per share today, up by 14.99%, and closed the day up by 8.86%. Yesterday, Macquarie increased its price target on the stock to $12.50 from $7.25 per share and that still leaves a lot of potential room to the upside, as it stands at just $7.55. JD.Com Inc (ADR) (NASDAQ:JD) spiked as much as 10.22% today and closed the day with gains of 8.11%. Zacks upgraded JD.com to ‘Hold’ from ‘Sell’ yesterday. Lastly, Vipshop Holdings Ltd – ADR (NYSE:VIPS) had the best day of the three, surging by 12.05% to $23.11.
The Chinese government finally seems to have put a halt to the brutal three-week-long rout in the Chinese markets, as the Shanghai Composite index closed up by 5.8% today while the Shenzhen Composite index also closed up by 3.8%. The CSI 300 Index, made up of the largest companies which are listed on the Shanghai and Shenzhen markets, closed ahead by 6.4%. China has a long way to go to fully recover, but it has put in place several strict measures to stop the plummeting markets and then to stabilize and grow them. Some of these measures include lending $42 billion to brokers to buy shares, announcing a new $40 billion stimulus plan, halting more than half of all listed companies from trading, delaying IPOs, fast-tracking government projects, and banning large shareholders from selling shares for the next six months. The renewed positivity in China affected the shares of Chinese firms trading in the U.S., as well as the markets in the U.S. in general. But what do hedge funds think of the three stocks we mentioned, which had big gains today? All in all, hedge funds have been positive, albeit there is a slightly negative sign with Vipshop Holdings which we’ll discuss on the following page.
But first, a quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy – which identifies the best small-cap stock picks of the best hedge fund managers – returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy, you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. They are like mutual funds now. Consider Ray Dalio’s Bridgewater Associates, the largest in the industry with about $165 billion in AUM. It can’t allocate too much money into a small-cap stock as merely obtaining 2% exposure would really move the price. In fact, Dalio can’t even obtain 2% exposure to many small-cap stocks, even if he essentially owned the entire company, as they’re simply too small (or rather, his fund is too big). This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to less than 55% for the S&P 500 (see the details).
Let’s discuss then on the next page how hedge funds have been trading our three featured Chinese companies.