Chinese ADRs, once hedge funds' growth darlings, have become a big drag on the industry's performance due to a massive sell-off in these names amid a crackdown from Beijing. One-third of hedge funds held a China ADR in their long portfolio at the end of the second quarter, according to Goldman Sachs' analysis of the latest 13F filings from 813 hedge funds with $2.9 trillion of gross equity positions. ADR stands for American depositary receipts, and they are effectively a way for U.S. investors to buy stakes in foreign companies. "The sharp declines across US-listed China stocks have been a headwind for hedge fund returns in recent months," Goldman equity strategist Ben Snider said in a note. The end of June was around the time when China stepped up its oversight on industries from tech to education to gaming. While it's not clear how many hedge funds adjusted their stakes since the quarter-end filings, the ones that sold their Chinese ADR holdings could have taken big losses given the magnitude of the sell-off. Many Chinese stocks have been in a freefall at a time when hedge funds' ownership stood at a record high. "The overall popularity of China ADRs registered as the highest in our data history, making clear that hedge funds were generally not prepared for the regulatory shift and its impact on share prices," Snider said. The government is clamping down on the flood of Chinese listings in the U.S. and is tightening restrictions on cross-border data flows and security. China also unveiled a ban that prevents companies that teach school curriculums from making profits, raising capital or going public. Ride-hailing app Didi was one of the biggest victims of Chinese authorities' crackdown. The stock has tumbled more than 40% since its June IPO after Beijing announced a cybersecurity investigation, suspending new user registrations. Didi may be forced to hand over shares containing special rights to the Chinese government, the Financial Times reported Monday . The average China ADR has declined by more than 50% since February, according to Goldman. Here's a look at the Chinese ADRs owned by the most hedge funds at the end of June. Within the China ADR universe , Alibaba is the most popular hedge fund holding. This is also the 17th consecutive quarter in which the e-commerce giant has ranked among the top 10 stocks, Goldman found. Beijing has looked to rein in Chinese billionaire Jack Ma's Alibaba by unleashing a series of investigations since last year. The stock is down 34% in 2021. JD.com is another hedge fund favorite, with 72 funds owning the stock at the end of the second quarter, according to Goldman. The stock was Chase Coleman's Tiger Global's biggest holding at the end of June, with a value over $4.1 billion. Coleman first bought the name in 2014. The stock has fallen more than 16% in the third quarter amid the heightened oversight. Baidu , Bilibili , Pinduoduo were also popular among hedge funds last quarter.
A trader works at the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., August 19, 2021.
Andrew Kelly | Reuters
Chinese ADRs, once hedge funds' growth darlings, have become a big drag on the industry's performance due to a massive sell-off in these names amid a crackdown from Beijing.