Why Hedge Funds Are Missing Out on the US-China Trade Rally—and Where Investors Should Look Instead

The sudden détente in U.S.-China trade tensions has ignited a market rally that hedge funds are struggling to capitalize on. While major indices like the S&P 500 and Nasdaq surged 3.26% and 4.35%, respectively, on news of the May 12 tariff cuts, many hedge funds remain anchored in defensive positions, underweight in the very sectors now poised to thrive. The reason? A delayed recognition of the strategic shift in trade dynamics—and the opportunity cost of clinging to outdated assumptions.

The Hedge Fund Misstep: Defensive Plays in a Bullish Turn

Hedge funds, historically quick to pivot, have been slow to abandon bearish bets on global trade. Many clung to cash or bonds, or shorted China-exposed equities, betting the tariff war would drag on. But the 90-day tariff truce, reducing U.S. levies from 145% to 30% and Chinese tariffs from 125% to 10%, has flipped the script.

The data is clear: sectors tied to U.S.-China trade are leading the rebound. Take tech stocks: Apple’s 6.3% jump, Tesla’s 6.75% surge, and Nvidia’s 5.4% gain reflect investor relief over averted supply chain disruptions. Meanwhile, luxury goods giants like LVMH and Hermes—reliant on Chinese consumers—rebounded 7% and 3.5%, respectively.

Yet hedge funds, slow to rotate out of defensive sectors like utilities and bonds, are lagging behind. The underscores the premium now placed on growth stocks. The lesson? Sector rotation is critical, and the window to act is narrowing.

Where to Deploy Capital: China-Exposed Sectors Are the New Safe Haven

The tariff cuts have unlocked value in three key areas:

1. Technology: The Supply Chain Reboot

The tech sector’s 4.35% Nasdaq-led rally was no accident. Companies like Apple and Tesla rely on Chinese manufacturers and components. With tariffs slashed, input costs for semiconductors, EV batteries, and consumer electronics will stabilize.

Play: Overweight semiconductor stocks (e.g., Intel, AMD) and EV manufacturers (NIO, XPeng).

2. Industrials: Shipping Stocks and Supply Chain Winners

Maersk’s 12% spike on May 12 wasn’t a fluke. Reduced tariffs mean a resumption of cargo flows—critical for global manufacturing. Industrials like Caterpillar and General Electric, which depend on Chinese demand for machinery, are also primed for gains.

3. Materials and Energy: A Rare Earth Renaissance

China’s suspension of rare earth export restrictions has lifted shares of companies like Molycorp, which supplies critical minerals for EVs and tech. Meanwhile, U.S. energy exporters (e.g., Exxon, Chevron) benefit from lower tariffs on coal and LNG.

Nomura’s APAC Call: The Next Frontier for Growth

Nomura analysts have gone all-in on Asia-Pacific markets, noting that the tariff truce removes a key drag on regional GDP. Countries like Vietnam (a manufacturing hub) and Taiwan (a tech powerhouse) stand to gain as supply chains stabilize.

The firm recommends overweight positions in APAC industrials (e.g., Samsung Heavy Industries) and consumer discretionary stocks (e.g., Alibaba, Tencent).

The Risks—and Why They’re Overblown

Critics warn the 90-day truce is temporary. True—but the market isn’t pricing in a return to 145% tariffs. The Budget Lab’s analysis shows reduced recession risks: GDP contraction projections dropped from -1.1% to -0.7%, and consumer price spikes eased by 40%.

Even if the truce expires, the U.S. and China now have a framework to negotiate further. Investors should focus on the immediate catalysts, not hypothetical future conflicts.

Act Now: Rotate or Risk Being Left Behind

The writing is on the wall: defensive bets are dead. Investors must aggressively rotate into China-exposed sectors and APAC equities while the window is open. The 90-day truce isn’t just a pause—it’s a reset.

Hedge funds’ hesitation is costly. The Nasdaq’s exit from bear market territory and the S&P’s surge prove the tide has turned. Delaying exposure to tech, industrials, and APAC markets risks missing the next leg of this rally.

The question isn’t whether to act—it’s how fast you can pivot.

Andrew Ross Sorkin