Capital flow confirmed Q1 "East rises, West falls": Hedge funds cut positions in the seven giants of U.S. stocks, wildly buying Alibaba and PDD

Reviewing the narrative of "East Rising and West Falling" in the first quarter, hedge fund capital flows have dramatically shifted, with a frenzied reduction in holdings of the "Seven Tech Giants" and an increase in positions in Chinese ADRs.

On Wednesday, according to the latest report from Goldman Sachs, hedge funds reduced their holdings in the "Seven Tech Giants" stocks in the first quarter of 2025 while increasing their investment exposure to Chinese companies listed in the U.S. The report analyzed the holdings of 684 hedge funds, with total stock positions amounting to $3.1 trillion.

Goldman Sachs strategist Ben Snider pointed out in the report:

Despite the escalating trade tensions at the time, funds still increased their investments in Chinese ADRs. The most favored ADRs among hedge funds include Alibaba, PDD, and Baidu.

However, Goldman Sachs stated that the timing of this rotation was poor: currently, the returns of the "Seven Tech Giants" in the U.S. stock market have exceeded 10% in the second quarter, while Chinese ADRs are under pressure due to trade tensions.

But subsequently, as trade tensions eased, the market rebounded, Goldman Sachs adjusted its 12-month target for the Chinese stock market back to the forecast levels prior to April 2, with target levels for MSCI China and the CSI 300 index set at 84 and 4600 points, implying upside potentials of 11% and 17%, respectively. Previously, Goldman Sachs economists raised their GDP growth expectations for the U.S. and China.

Clear Valuation Advantage for Chinese Tech Stocks, U.S. Short Interest Hits New Highs

The shift in the first quarter highlighted the growing appeal of Chinese tech stocks. As China's influence in developing new technologies rises, Chinese tech stocks have become more attractive to foreign investors. Earlier this year, advancements by Chinese AI startup DeepSeek shook global markets, leading to a plunge in the stock prices of the "Seven Giants," marking a turning point for global investors' perception of the Chinese tech industry.

The additional appeal of Chinese tech companies lies in their typically lower valuations compared to their U.S. counterparts, with Alibaba's expected price-to-earnings ratio around 13 times, while PDD's ratio is less than 10 times. Among the "Seven Giants" in the U.S. stock market, only Google's parent company Alphabet has a price-to-earnings ratio below 20 times.

At the same time, the surge in short positions in U.S. stocks has pushed the total leverage of hedge funds to record levels. The report noted that the short position in S&P 500 constituent stocks accounts for about 2.3% of the float, up from 1.8% in December last year, marking the first time since 2021 that short positions have exceeded historical averages. Despite net selling, Amazon, Meta, Microsoft, Nvidia, and Alphabet remain among the most popular long positions for hedge funds