Beyond the wall: transforming China’s inefficiencies into alpha opportunities through equity long short investing

China

China continues to offer one of the richest, and most misunderstood, equity opportunity sets in global markets. Macro uncertainty, regulatory interventions, shifting policy priorities and persistent market inefficiencies have created an environment where traditional long-only investing often struggles to capture value. However, these very complexities make China a highly attractive market for long/short strategies, where differentiated insights, disciplined risk management, and active exposure adjustment can extract meaningful alpha from both winners and losers.

A macro landscape that rewards selectivity
China’s macro landscape is still in transition. Policymakers are steering the economy away from overcapacity, speculative excess, and the so-called involution dynamic, where firms compete aggressively without generating real productivity gains. Recent measures targeting property developers, exporters with razor-thin margins, and manufacturers benefiting from subsidies highlight a clear policy direction: quality over quantity.

At the same time, China is fostering strategic sectors such as AI, semiconductors, renewables, healthcare technology and high-end industrial automation. These policy signals generate strong divergence across industries. In such an environment, long/short investors can go long companies aligned with policy tailwinds while shorting those facing structural or regulatory headwinds, turning macro uncertainty into an alpha source rather than a risk.

Market inefficiencies: a structural advantage
China remains one of the world’s most inefficient major equity markets. Retail investors still account for a large portion of daily trading volumes, contributing to:

High levels of sentiment-driven volatility
Momentum overshoots
Rapid rotation between themes
Behavioral biases such as herd behavior and panic selling

These characteristics create mispricing on both sides of the market. While long-only investors suffer from these swings, long/short managers can systematically exploit them, building long positions in oversold quality names and short positions in speculative or structurally challenged companies.

A market of leaders and laggards
Despite the headlines, many Chinese companies are not only thriving, they are becoming global leaders. In advanced manufacturing, robotics, EV supply chains, battery technologies and digital services, China has produced companies with accelerating earnings, strong balance sheets and expanding competitive advantages. These belong on the long side of a portfolio.

Conversely, firms trapped in industries targeted by the government’s overcapacity crackdown, traditional manufacturing, low-margin exporters, uncompetitive commodity producers, face structural pressure. These make compelling short candidates, especially when valuations remain disconnected from fundamentals.

Strong alpha generation: what the chart shows
The attached Chart of the Month illustrates precisely this dynamic.

Over the past decade, the Chinese equity market, represented by the MSCI China Index, has delivered only modest performance. In contrast, Chinese long/short equity managers, as measured by the Eurekahedge Index, have achieved returns approximately twice as high. Moreover, through disciplined manager selection, it has been possible to enhance results even further, generating performance levels that exceed the Eurekahedge Index by a substantial margin.

Conclusion: the right strategy for the right market
China is a market where macro shifts are decisive, policy direction matters, and inefficiencies are abundant. This environment naturally favors investors who can go long the future winners and short the inevitable losers, a capability that long-only strategies simply do not possess.

As the Chinese economy continues to evolve, so too will its equity markets. The long/short approach offers a disciplined, opportunity-driven way to harness China’s growth potential while managing risks in a market that rewards agility, research depth and selective exposure. For investors seeking to participate in China’s next chapter, long/short is not only a smart approach, it is the most adaptive one.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. NS Partners provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instrument referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the FINMA cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the NS Partners Group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.
© NS Partners Group

Alternative Funds – The year people beat the machines

Alternative funds

2020 was a particularly good year for our alternative investment funds. All strategies – Long/Short Equity, Global Macro and Absolute Return – amply outperformed the financial markets and their benchmarks.

A rogue year

The year unfolded as a series of rogue waves, one-offs that plunged the world into multiple uncertainties.

Investors’ nerves were sorely tried, not just by the Covid-19 pandemic, which shut down economies across the planet, but also by the chaotic Brexit negotiations and the dystopian novel that was the US presidential election, which has only now come to its conclusion.

All of which explains why 2020 marked the resurgence of active portfolio managers and talent, after an 11-year bull market that had given computer-managed quant or index funds an easy ride.

Our winning allocations in 2020

Computer algorithms use historic market data to extrapolate behavioural rules and attempt to predict future trends. In this unprecedented year, with markets on a roller coaster ride and massive sector rotation, it is easy to see why quantitative managers and index funds struggled to stay on track. In contrast, Notz Stucki’s alternative strategies fulfilled their protective function, while also generating above-average returns. Our decisions of allocation underlay this success.

China. We had heavily overweighted the Chinese market and captured the full force of its rebound. Unlike the world’s other leading economies, which suffered the full force of lockdown measures, China quickly overcame the health crisis and was able to play the world’s saviour, churning out masks and returning to economic growth.
Long Short Equity. Last year’s volatility was generally good for long/short strategies, which successfully played both bull and bear runs. But while this was a good year overall for stock markets, which quickly made back March’s losses, results varied widely from sector to sector. Managers needed to pick the right horse and react fast to fast-moving events. 2020 felt very different if you were an airlines rather than a tech giant… In this environment, we profited from our preference for multi-sector funds and dynamic allocation rather than funds specialising in a narrow theme.
Global Macro. Long ignored because of their disappointing performances during the bull market, Macro funds bounced back in 2020, as volatility surged and star portfolio managers in the category seized the chance to place their bets and prove their talent.

Long-term commitment bears fruit

As 2020 has once again shown, there are portfolio managers with talent, star managers who can generate alpha and regularly outperform their peers. The challenge is to find them, pick them carefully and combine them in high-performance multi-manager portfolios. This has been our area of expertise for over 50 years.

It is a demanding business that needs specific skills. These cannot be improvised but require real commitment over the long term:

Perfect understanding of the strategies being used. Hedge fund managers apply a wide range of complex techniques and use sophisticated financial instruments. Picking managers and building a multi-manager portfolio therefore demands that our management teams perfectly understand the strategies being implemented, so they can judge whether they are valid and right for current market conditions.
Human factor is key. In the finance industry, often fixated on figures, our long years of experience have taught us that it is the human factor that counts. This is why, as well as rigorous quantitative analysis, we also carry out an in-depth qualitative analysis. We meet each of our managers, so we can get to know their teams, see how they are organised and understand their motivations. One of the criteria we always check is that they are personally invested alongside their customers, which ensures their interests are aligned.
Know the market. Unlike most traditional funds, hedge fund managers often voluntarily restrict the size of their funds. By keeping them to a manageable size they can get better performances as their strategies generally work better when the scale of bets is not too large. The good hedge funds are quick to close their fundraisings and it is therefore essential to have an excellent network of contacts to know when a new fund is being launched. Over 50 years, we have built a unique reputation in our market and are often one of the first doors these managers knock-on when they are starting up a fund.

What strategies for 2021?

With markets at highs, economies still shackled by the pandemic and a new president in charge of the world’s biggest economy, there are plenty of uncertainties to be going on with. Markets may well, then, remain volatile, prey to the jitters of investors.

Hedge funds may therefore again come to the fore. What will be the winning strategies? It is too early to say, but one thing is sure: it will be helpful to have an experienced partner with an established reputation.

Past performance is not indicative of future results. The views, strategies and financial instruments described in this document may not be suitable for all investors. Opinions expressed are current opinions as of the date(s) appearing in this material only. References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are provided for your information only. Notz Stucki provides no warranty and makes no representation of any kind whatsoever regarding the accuracy and completeness of any data, including financial market data, quotes, research notes or other financial instruments referred to in this document. This document does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Any reference in this document to specific securities and issuers are for illustrative purposes only, and should not be interpreted as recommendations to purchase or sell those securities. References in this document to investment funds that have not been registered with the Finma cannot be distributed in or from Switzerland except to certain categories of eligible investors. Some of the entities of the Notz Stucki group or its clients may hold a position in the financial instruments of any issuer discussed herein, or act as advisor to any such issuer. Additional information is available on request.

NS Macro Outlook and Investment Opportunities, 28 April 2020

NS Macro outlook & Investment Opportunities, 28 April 2020

Due to the COVID-19 pandemic, world economies face the worst peace-time hit to GDP since the Great Depression. Markets have reacted accordingly, with very severe downturns in all risk assets, a dearth of liquidity in the credit space, and a steady flight to safety in long term high grade Government bonds and Gold. Due to the magnitude of the expected recession to come, Central Banks have entered the game. In the famous 1964 French movie ‘Greed in the sun’, one of the main characters says “when 290-pounds guys are speaking, 130-pounds guys listen”. So markets listened to the heavyweight central bankers, who committed to do whatever it took to avoid the lockdowns snowballing effect on the economies. So far, April is a good month for equities, and credit is healing gradually.

In this context, it is obviously paramount to position portfolios for what is coming. This is easier said than done, as it is impossible to have a clear view of what will happen. Nevertheless, this crisis has created opportunities in credit, with the huge dislocation still going on, and in equities, with clear winners and possible long term losers. Active management is often rewarded in this type of situation.

During this video conference, our speakers presented their asset allocation views and portfolio positioning for the weeks and months to come, discussing topics such as stock picking, sectorial trends and long/short investing.

The full presentation is available here.

For professional investors only.