Hedge funds cut their holdings of the so-called Magnificent Seven technology stocks while increasing exposure to Chinese companies listed in the US during the first quarter, according to Goldman Sachs Group Inc. strategists.

Funds increased their investments in Chinese firms’ American depository receipts despite heightened trade tensions, strategists including Ben Snider wrote in a note dated May 20. The most popular ADRs held by hedge funds include Alibaba, PDD Holdings Inc and Baidu, the note said.

The shift highlights the growing appeal of Chinese tech stocks, which have become attractive to foreign investors on signs of the nation’s rising clout in developing new technologies. The advances of AI start-up DeepSeek shook global markets earlier this year, leading to a rout in the Magnificent Seven shares and marking a turning point for how global investors view China’s tech sector.

Chinese tech companies have an added appeal since they often trade at lower valuations than their US peers. Alibaba is trading at a forward price-to-earnings ratio of around 13, while PDD’s P/E is less than 10. Among the Magnificent Seven tech stocks, only Google parent Alphabet Inc. has a P/E below 20, according to data compiled by Bloomberg.

Still, the strategists pointed out that the rotation was poorly timed: The Magnificent Seven stocks have returned more than 10% during the second quarter so far, while trade tensions have weighed on China ADRs.

Despite the net selling, Magnificent Seven megacaps such as Amazon.com, Meta Platforms, Inc., Microsoft, NVIDIA, and Alphabet remain among hedge funds’ most popular long positions, the Goldman Sachs analysts said. The analyzed the holdings of 684 hedge funds with $3.1 trillion of gross equity positions for the report.

Meanwhile, surging short interest has lifted hedge fund gross leverage to a record. Short interest in the median S&P 500 stock is around 2.3% of float, up from 1.8% in December, the analysts wrote, adding that it was the first time since 2021 that short interest had risen above the historical average.