(Bloomberg) -- The selloff in China’s equity market at the start of the year has Luis Stuhlberger looking for opportunities in the battered shares of smaller companies.

The Brazilian money manager’s flagship Verde fund built a long position on a Chinese small-cap index it didn’t name, according to an investor note Friday. The wager was placed via options, the fund added, without disclosing its exact size.

It’s a “small, opportunistic position,” Verde Asset Management wrote. Chinese stocks had a “horrendous” January, helping send other assets lower, including Brazil’s benchmark Ibovespa index, the Sao Paulo-based fund said.

A favorite trade among Chinese retail and institutional investors in 2023, small-caps had a rough start to the year amid growing concerns around China’s economic health. The CSI 1000 Index tumbled 15% this year, underperforming blue-chip benchmarks, as investors bet that measures to revive the market will prioritize larger firms. Structured derivatives and quantitative funds are seen to have amplified the recent selloff.

A growing number of investors are using options to capture potential upside in Chinese shares. Exchange-traded products that track Chinese stocks have seen a spike in option volume as traders gear up for a bounce in beaten-down shares. Chinese stocks just recorded their biggest weekly inflow on record, partly driven by state-backed investors, according to Bank of America and EPFR data.

Verde’s flagship hedge fund is up over 24,300% in local currency terms after fees since its 1997 inception, with almost double the annual return of the Ibovespa. The firm ranks among Brazil’s largest independent asset managers, overseeing about 24 billion reais ($4.8 billion).

The Verde fund fell 0.28% after fees last month, underperforming the 0.97% gain for the CDI rate, the benchmark for local hedge funds.

©2024 Bloomberg L.P.