By Summer Zhen
HONG KONG (Reuters) - Global hedge funds dumped China and broader emerging markets shares while buying U.S. equities in a sharp rotation in October ahead of the U.S. election, Goldman Sachs said.
China, where stock markets surged 20% last month boosted by a raft of stimulus policies, has now seen heavy outflows this month, according to Goldman's prime brokerage team. China no longer publishes timely data on foreign flows into the mainland market.
Goldman Sachs estimates that hedge funds have clawed back nearly 80% of the peak cumulative buying in Chinese equities as of Oct.23, the prime brokers team said in a note.
"This month's net selling in emerging markets is tracking to be among the largest on our record, led by selling in Chinese equities," Goldman Sachs said.
The retreat comes as China's markets, too, have pulled back from peaks as investors have been disappointed with the lack of details around Beijing's stimulus promises and as the possibility of a Donald Trump presidency raises tariff risks.
Other emerging markets, including India, Taiwan, South Korea, and Latin America were also sold by hedge funds so far this month, Goldman Sachs added.
MSCI China index lost 4% this month after a sharp 23% rise in September - its best monthly run in 22 months. MSCI emerging markets Index, meanwhile, dropped 3% so far in October, compared to a 6.5% September gain.
Hedge funds instead rotated back to U.S. equities for the first time in six months as solid job data and corporate earnings offset recession fears, the bank said.
Additionally, to be prepared for the increasing volatility amid the close U.S. presidential race, Goldman Sachs said hedge funds as a whole lowered leverage in the past week and in October, with stock picking funds' gross leverage level near 12-month lows, suggesting a more cautious stance.
On average, global stock picking hedge funds are up 0.6% in October and 11.9% so far this year, while systematic equities long/short funds are down 0.9% in October but up 18.7% year-to-date, the note said.