Hedge fund beats 97% of peers betting on shipping over AI

A contrarian bet on shipping over artificial intelligence has propelled a Hong Kong hedge fund past 97% of its peers, delivering returns of over 30% this year by challenging the market's prevailing tech narrative. HD Capital Ltd.’s Tianyu China Fund, which has returned over 230% in the last five years, held shipping as its largest sector exposure at 11% as of April.

"The shipping sector is in a strong upward cycle," Wang Yeqing, Chief Investment Officer of HD Capital, said in a statement. He argued that even without geopolitical conflict, the cyclical uptrend in shipping rates remains solid due to fundamental supply and demand shifts.

The $200 million multi-asset fund's strategy is heavily weighted towards physical assets, with an 11% allocation to oil transport and another 6.1% in shipbuilders as of April. This stands in stark contrast to its view on the AI boom, where Wang sees a bubble. The fund is avoiding large AI model companies like MINIMAX-W and KNOWLEDGE ATLAS, citing "severe product homogeneity, unclear business models, low certainty and relatively high valuations."

This investment thesis suggests that the capital-intensive race for AI dominance may not yield profits for the model developers themselves. The fund's success could prompt a broader market reconsideration, potentially driving capital from highly-valued AI software firms toward the less glamorous, but currently more profitable, industrial and cyclical sectors.

Shipping's Cyclical Uptrend

According to Wang, the fundamentals for oil tankers and shipping are strengthening. He points to the US intensifying sanctions last year to curb Iran's energy exports as a key factor. This has accelerated the phasing out of non-compliant fleets, tightening the available supply of compliant oil tankers and increasing their market share and pricing power. This supply-side constraint provides a durable tailwind for shipping rates, independent of near-term geopolitical headlines.

AI's "Clear Bubble"

While bullish on the physical world, HD Capital is openly bearish on the valuation of AI software. Wang believes there is a "clear bubble in current large models and AI capex." He argues the massive investments being made by internet giants are difficult to recoup through cloud services and advertising, putting significant pressure on their cash flow. Instead of the popular large model companies, the fund favors the picks-and-shovels plays of the AI buildout, such as computing power-related hardware like data centers and power equipment, which have more direct and predictable revenue streams. The fund's performance was also bolstered by investments in bonds from issuers like New World Development, further highlighting its strategy of seeking value in traditional assets.

This article is for informational purposes only and does not constitute investment advice.