Marshall Wace Hedge Fund Warns Chinese ADRs Have Become ‘Uninvestable’
(Bloomberg) -- For one of the world’s largest hedge funds, U.S.-listed Chinese stocks just aren’t worth the risk anymore.
Paul Marshall, co-founder of $59 billion investment firm Marshall Wace, said China’s crackdown on its technology and education sectors has repelled investors, even if authorities have sought to limit the damage. It’s now more likely that the country’s listings will be largely confined to the mainland, the billionaire predicted.
“The effect of these various interventions, especially the timing of announcements around the Didi listing in the U.S., has been to discourage many U.S.-based or international investors,” Marshall said in a letter to clients last week. “You could argue that U.S.-listed Chinese American Depositary Receipts are now uninvestable.”
Marshall’s warnings follow Beijing’s sweeping anti-monopoly probes against Big Tech, cybersecurity reviews for foreign listings and decision to ban profits in after-school tutoring companies, which sent shock waves through global financial markets last month. Investors now fret what’s coming next.
Latest regulatory filings in the U.S. show some of the world’s best-known hedge funds such as George Soros’s investment firm, D1 Capital Partners and the investment firm run by Dan Sundheim were already lightening their exposures and at least partially dodged the meltdown in Chinese companies.
Marshall Wace trimmed exposures to ADRs of Chinese companies such as Tencent Music Entertainment Group, iQiyi Inc. and Baidu Inc. in the second quarter, according to filings with the U.S. Securities and Exchange Commission.
A spokesman for the London-based firm declined to comment.
For much of the industry, betting on Chinese stocks has been one of the most painful wagers this year. The Nasdaq Golden Dragon China Index, which tracks 98 of China’s biggest U.S.-listed firms, has slumped 32%. At least half a dozen Asia-based hedge funds have suffered double-digit losses amid the selloff.
“The risk premium which you have to apply because of the policy risk makes it unattractive to issuing company and investor alike,” Marshall said.
Marshall Wace’s flagship MW Eureka fund gained more than 1% last month and made money on its bets on Chinese firms. Although the money pool was net long on Chinese stocks, it had short bets against U.S. and Hong Kong-listed shares, according to the letter.
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