The secret to hedge funds' excess returns since 2025: Buying Chinese technology stocks.

As Chinese artificial intelligence startup DeepSeek rises comprehensively and leads a new "AI large model algorithm paradigm" with "very low cost" and "high energy efficiency" as its core, DeepSeek starts to collaborate deeply with various industries such as healthcare, finance, and education, as well as AI innovation products/services brought by deep integration with consumer electronics and other application terminals. This is expected to drive China's semiconductor, SaaS software, cloud computing, and all industries' sales revenue and operating profit into a new growth paradigm, ultimately boosting global investors' enthusiasm for the Chinese stock market, especially in technology stocks. Looking at the investment returns of global hedge funds so far this year, the secret or magic weapon to outperform peers' average levels or benchmark stock indices since 2025 seems to have only one guideline: allocation of Chinese technology stocks. Statistics show that in the previous month, the Chinese AI investment frenzy driven by DeepSeek and Unitree Robotics (Siasun Robot & Automation) has led to a strong rise in the Chinese stock market (including Hong Kong stocks and A-shares) under the strong leadership of technology stocks. In particular, the Hang Seng Tech Index, which includes Alibaba, Tencent, and Xiaomi, has surged nearly 30% since February, significantly increasing the returns for several hedge funds and long-only funds that hold Chinese technology stocks. DeepSeek has introduced an open-source AI large model with very low cost and performance comparable to OpenAI's flagship inference model, while Unitree Technology has showcased its globally leading humanoid Siasun Robot & Automation technology. These have ignited global hedge funds' enthusiasm for investing in the Chinese stock market. The MSCI China Index surged nearly 12% in February and is expected to continue its upward trend this month, with leading stocks expected to benefit from the widespread application of these technologies. The MSCI China Index has entered a "technical bull market," covering core Chinese assets such as Alibaba, Tencent, Kweichow Moutai, and China Yangtze Power, currently hovering around 77 points, while the Shanghai and Shenzhen 300 Index is hovering around 3940 points. According to Goldman Sachs' bullish expectations, these two major indices still have room to rise, with the Goldman research team raising the target points for the MSCI China Index and Shanghai and Shenzhen 300 Index to 85 points and 4700 points, respectively. The market value of the seven Chinese tech giants, including Alibaba and Tencent, has surged by $439 billion this year, surpassing their once unbeatable American tech counterparts. Some investment institutions believe that there is further room for the outstanding performance of Chinese technology stocks. The "equal weighted stock basket" index of seven Chinese tech giants, such as Alibaba and Tencent, has risen by over 40% this year. In contrast, the stock index measuring the seven tech giants in the US has fallen by about 10%, causing a significant pullback in the Nasdaq 100 index, which includes many popular tech stocks, with a decline of over 5% this year. The sharp drop in the seven giants has led to some hedge funds investing heavily in them to achieve much lower returns than their peers who bet on Chinese tech stocks. This sharp reversal at the end of last year was not foreseen by many Wall Street investment institutions. Earlier this year, the Nasdaq hit a record high, while Chinese tech stocks were still under pressure from regulatory scrutiny and lower attractiveness in technology compared to their American counterparts. However, almost overnight, DeepSeek and Unitree Technology disrupted people's perceptions that China would need years to catch up with the US in AI and Siasun Robot & Automation dominance. Several hedge funds that chose to invest in Chinese tech stocks have seen significant increases in returns. Under the strong push to allocate Chinese tech stocks, including Triata, Viridian, Aspoon, Red Gate, and Keywise, many hedge funds have achieved investment returns far superior to their peers in February, with some companies achieving their best monthly performance since inception, thanks to their allocation in Chinese AI-related software companies, data center operators, and humanoid Siasun Robot & Automation-related companies. The founder of Hong Kong Keywise Capital Management Ltd. said, "The Chinese stock market may be reevaluated by the market this year. DeepSeek and Unitree are prompting people to reassess China's tech development prospects." Triata Capital According to reports citing informed sources, this Chinese hedge fund achieved a return rate of 39% in February, mainly benefiting from bullish bets on Chinese AI software and data center stocks. Chief Investment Officer Sean Ho's career began at global quantitative trading giant Susquehanna, and before starting his own company, he built alternative data systems at Hong Kong Tybourne Capital Management. Informed sources revealed that Triata used alternative data such as corporate recruitment activities to buy into China's data center operator Global Data Services (GDS) ADR at $5-6 range in the first quarter of 2024. When a small stake was sold last year, the valuation of GDS's international business was around $3.86 per ADR, indicating that the market heavily undervalued the potential of China's AI software and infrastructure demand. The stock price of GDS surged above $40 in February. In addition, Triata, managing assets of over $1 billion, also holds shares in tech companies in the cloud computing and video streaming areas. Viridian Pascal Guttieres, Chief Investment Officer at Viridian Asset Management, revealed that the fund achieved a return rate of about 6% in February (the best since its successful operation in August last year) by participating in the offerings of Chinese tech companies listed in Hong Kong such as ROBOSENSE, Crystal Technology, and BLACK SESAME. These launched offerings were priced at a premiaThe price was often significantly lower than the market value at the time, providing a good profit opportunity for stock market funds such as Viridian when the stock price rose. Viridian, managing $130 million, will this month launch a new agreement to manage $200 million for American investors, with the scale expected to reach $400 million on an annual basis.Aspoon Capital Insiders said that this fund, which focused on Chinese AI-related technology stocks last year, saw a 4.8% increase in returns in February and a 58% return for the full year of 2024. In investor letters in December and January, the organization announced the arrival of the "Chinese ChatGPT era," believing that this market trend is more sustainable than last October. Aspoon, led by Ryan Yin from Tiger Pacific Capital, pointed out that while DeepSeek may not be able to monetize all of its traffic and attention, the two giants - Alibaba and ByteDance - have ample resources to achieve this goal. This will open up a new era of artificial intelligence spending and infrastructure, similar to the surge in stock prices and valuations enjoyed by Amazon and Microsoft in the U.S. stock market two years ago. Alibaba's stock price has surged over 70% in the Hong Kong market this year. Compared to the U.S., where AI infrastructure construction began on a large scale in 2023, China's infrastructure construction is relatively late. With the integration of DeepSeek into various industries and the huge demand for AI inference capability brought by the large C-end customers, the popular "excess computing power" theory in the U.S. stock market may not appear in the Chinese stock market for quite some time. This is also the core logic behind the recent significant inflow of international funds into Hong Kong and A-shares. In Hong Kong, the optimistic sentiment about the "bull market" trend is even more fervent than in A-shares. Benefiting from the Fed's rate cuts and the liquidity support provided by domestic monetary stimulus policies, Hong Kong has been enjoying the "dual liquidity dividend" from China and the U.S. since September last year. With the recent explosion of investment in Chinese AI following the introduction of DeepSeek, Hong Kong, as the gateway for foreign investment in the Chinese market, has become the best entry point for external asset management institutions such as hedge funds to invest in Chinese companies, attracting a rush of foreign capital to Hong Kong. Red Gate According to institutional statistics, the Red Gate China Growth Fund (long-only type) saw an 8% increase in investment returns in February, mainly driven by high-end manufacturing and IT stocks in China. The research team of the organization stated in an email that the demand for Siasun Robot & Automation will exceed the total of electric cars and smartphones, with a market size reaching trillions of dollars. Chinese and global Siasun Robot & Automation manufacturers will start mass production this year, and the team recommends focusing on component suppliers with low-cost mass production capabilities. However, the team also warned that the hype around Siasun Robot & Automation stocks may cool down as valuations have already priced in actual applications and orders. The early focus should be on identifying future winners and the entrepreneurs and technologies behind them, rather than valuation. In the field of artificial intelligence, Tencent's WeChat application is testing the integration of DeepSeek's AI large models into its search engine. Red Gate's analysis shows that this can expand into various service functions for e-commerce and lifestyle. The team also wrote that Alibaba recently announced plans to invest more in artificial intelligence over the next three years than in the past ten years, showing a "change in management thinking." This "shows that a group of private enterprises are transitioning from an economic winter to actively engaging in business activities." Keywise The Keywise Penguin Development Fund is estimated to have a 5.9% increase in returns in February, with the main income coming from technology stocks in the Hong Kong market. Keywise manages approximately $2.5 billion in funds, has increased holdings in China's leading cloud service provider Alibaba and Tencent; and also bought Ctrip, believing that the company can use artificial intelligence to enhance travel planning and customer service. The organization believes that Xiaomi and BYD Company Limited also have the potential for an AI-driven transformation. About ten years ago, Keywise laid out a new energy, electric vehicle, AI and Siasun Robot & Automation technology trends, and now manages approximately $2.5 billion in assets. Most of Keywise's investments are in the U.S. and Chinese stock markets. Is the frenzy of Chinese technology stocks not over yet? For both Hong Kong and A-shares, the introduction of the epoch-making "ultra-low-cost AI large model" by DeepSeek has become an unprecedented catalyst for global investors to reevaluate Chinese assets, at a time when they were already concerned about the rising valuations of U.S. technology stocks. The emergence of DeepSeek has ignited a global funding frenzy, drawing in leveraged hedge funds and traditional asset management giants, around the unprecedented investment craze in the field of Chinese artificial intelligence. Charu Chanana, chief investment strategist at Saxo Markets, said: "The success of DeepSeek, and the series of artificial intelligence models launched by Chinese technology companies, reminds the world that despite U.S. restrictions on chip exports, China's innovative strength cannot be underestimated." "Given the valuation discount, there is still significant upside potential for Chinese technology stocks." French Industrial Bank has listed a group of Chinese companies based on market value and growth trajectory, including the so-called Chinese "seven tech giants": Tencent, Alibaba, Xiaomi, BYD Company Limited, Semiconductor Manufacturing International Corporation, JD.com, and NetEase. According to a report released by the market strategy team led by Frank Benzimra of the institution on February 28, the overall expected P/E ratio of this basket of stocks is only 18x, a discount of over 40% compared to the "seven giants" of the U.S. stock market. The Hang Seng Tech Index rose more than 2% on Friday and has risen by about 10% this week. The index is currently at its highest level since the end of 2021.Despite a significant increase this year, the Hang Seng Tech Index is still about 40% lower than its peak in 2021. The index has only returned 18% over the past five years, which is only a small fraction of the over 130% increase in the Nasdaq 100 index during the same period.With the return of Donald Trump to the White House shaking the global trade order with a series of tariffs, making American businesses and consumers uneasy, as part of the narrative of "American exceptionalism", the unstoppable rise of the US stock market is being shaken. The strong upward trend in the stock prices of large American tech giants such as Nvidia, Microsoft, and Google has encountered significant obstacles in recent years as investors question the validity of these companies' high valuations and the rationality of their high AI spending, demanding more profit surprises and a clearer monetization path for artificial intelligence. In particular, since the emergence of DeepSeek-R1, which combines the labels of "low cost" and "high efficiency", the logic of the "seven giants" including Nvidia, Microsoft, and Google leading the US stock market has undergone a fundamental change. Investors are starting to strongly question whether the fervent AI spending plans of American tech giants on artificial intelligence are reasonable. Apart from Meta, the stock performance of other giants has significantly underperformed the S&P 500 index, becoming the most core negative catalyst dragging the entire US stock market up. When comparing the Chinese "seven giants" - Tencent, Alibaba, Xiaomi, BYD Company Limited, Semiconductor Manufacturing International Corporation, JD.com, and NetEase - to the US "seven giants", the strong growth performance of the Chinese seven giants is much cheaper in terms of valuation. A research report released by BNP Paribas showed that after the tightening of regulations in the Internet industry, the valuation of the Chinese "seven giants" decreased by almost 50%. Subsequently, the forward price-earnings ratio has been fluctuating narrowly between 14x and 20x. Although stock prices have rebounded recently, this combination has not yet reached the upper limit of the past three years, still about 10% lower than the average level of the past five years. The valuation premium of the Chinese tech "seven giants" has decreased from around 115% before 2021 to about 55% currently. This is about 20 percentage points lower than the average premium of the past five years. Compared to the US "seven giants", there is a greater level of valuation discount, currently about 45%. Vey-Sern Ling, Managing Director of Union Bancaire Privee, said, "The necessary driving factors for the excellent performance of Chinese tech stocks are in place, including high-level government support, expectations of profit recovery, and structurally driven growth themes in artificial intelligence. The valuation of US tech stocks has expanded significantly for two consecutive years, and now disappointing earnings data and macroeconomic factors leading to 'stagflation' are pushing for selling, which is driving rotation from the US to Europe and China to some extent." The other side of hedge funds: Strategies focusing on the US "seven giants" are not optimistic about returns Due to the significant volatility in the US stock market reversing the momentum of key trades and severely impacting US tech stocks, especially the so-called "seven giants" - Apple, Microsoft, Google, Tesla, Nvidia, Amazon, and Meta Platforms, the returns of Millennium Management, Citadel, and other top hedge funds in February were flat, underperforming the S&P 500 index and the average level of peers. The "seven giants" have been the core driving force behind the constant new highs of the S&P 500 index and the Nasdaq 100 since 2023, but this year, apart from Meta, they have become significant drags on the returns of hedge funds. Analysts at JPMorgan pointed out in a report to clients that the volatility from the end of January to February "has raised many questions from investors about the performance of hedge funds". The analysts also added that the positions in technology, media, telecommunications, and some consumer stocks were overly crowded, leading to "some dismal performances" in certain funds. The S&P 500 index fell by 1.4% in February, with a year-to-date increase of only 1.2%. In US dollars, it lagged behind the Euro Stoxx index and MSCI China index by over 10 percentage points in the first two months of the year. The market turmoil caused by the sharp drop in US tech stocks also impacted major macro hedge funds. Said Haidar's Haidar Jupiter Fund investment returns fell sharply by 6.3% in February. Brevan Howard's BH Master Fund fell by 1.6% in February, down 4.5% since January 1st. Its BH Alpha Strategies performed relatively well, rising 0.7% in February and up 2.25% year-to-date, but still significantly lower than the overall returns of hedge funds buying Chinese tech stocks.