Man Group's discretionary fund unit turns 'underweight' on China

By Summer Zhen

HONG KONG (Reuters) - Man GLG, the discretionary investment unit of the world's largest publicly traded hedge fund, has gone "underweight" on China after cutting holdings there since January, while pursuing opportunities such as India and AI, a senior fund manager said.

As China's recovery prospects fade, dashing the high hopes that followed last year's post-pandemic reopening, the unit of Man Group is finding it hard to spot long-term, high-growth China stocks worth investing in, said Andrew Swan, Man GLG's head of Asia equities excluding Japan.

"It's a bit tricky to find ideas," Swan said in a phone interview from his Sydney office this week.

"Fundamentally, India surprises positively and China surprises negatively in our view, so naturally investors will take more money out of China and put it into India," he said.

Swan, whose comments marked a sharp contrast with the widespread optimism of just six months ago, said Man GLG - with $26 billion in assets under management - had increased its exposure to India and Southeast Asia in its Asia ex-Japan book.

He also pointed to the explosive development of artificial intelligence as the biggest surprise of the year so far, and is adding Taiwan semiconductors to be better positioned for the AI revolution.

Foreign investors have grown disillusioned with the dull post-COVID-19 recovery in China's economy, the world's second-largest, while worries mount over persistent structural problems such as high unemployment and local government debt.

China's stock benchmark, the CSI 300 Index, has lagged other major world markets, slipping in recent days to its lowest since November and relinquishing most of the gains from the reopening rally, which began last October when authorities began easing COVID-related restrictions.

Hedge funds' net allocations to China have steadily declined from their recent peak at the end of January, Goldman Sachs said in a note last week, while foreign buying has picked up strongly since April elsewhere in North Asia and in India.

Man GLG changed its view on China to positive in the third quarter of last year, just ahead of the reopening, while the switch to "underweight" was made about three months ago, Swan said.

"As the initial optimism on the recovery has faded, the harsh reality of the situation in China has emerged that there's not a lot of confidence there," Swan said.

"We changed our view really from the first quarter where we started to take some money off the table after the rebound."

Year-to-date returns on Man GLG Asia (ex-Japan) Equity Fund's USD Class managed by Swan were largely flat as of the end of May, according to Refinitiv data.

Swan said his team would continue to own Chinese travel, entertainment and food service stocks while focusing much of their effort on identifying companies in China that would benefit from rapid developments in generative AI.

(Reporting by Summer Zhen; Editing by Edmund Klamann)