(Bloomberg) -- A top Chinese macro hedge fund is warning investors against piling back into small-cap stocks, saying the cohort will face a “mid-to long-term reversal.”

They “are small, expensive, and trashy,” Li Bei, founder of Shanghai Banxia Investment Management Center, wrote in a WeChat post. Instead of small-cap index enhanced quantitative products, she has recommended those pegged to the CSI 300 Index since the fourth quarter, given that the former will likely undergo a “profound reversal” in the next two to three years.

Small-caps have been at the epicenter of a perfect storm surrounding the quantitative fund industry amid an unwinding of positions. Quants were heavily invested in smaller stocks and the crash earlier this year burned them, while a rush to offload shares caused an even bigger selloff.

These shares had plunged in January before a rapid rebound as state-backed funds expanded their support to the sector. A gauge of the cohort remained in the red this year. 

While many have exited their positions before the Lunar New Year holidays, some fund managers are returning to small caps, according to Li, citing recent exchanges with others in the industry.

Known as a long-time stock bull, Li has been wrong-footed in the extended market downturn and admitted to mistakes after suffering the worst losses of her career. Her flagship fund fell 25% from a peak in the middle of last year, leading her to slash stock positions last month to stop losses.

That may turn out to be another misstep after Chinese stocks posted a stunning reversal in February. Major benchmarks in China have erased or came close to wiping out their year-to-date losses thanks to Beijing’s forceful support measures.

--With assistance from Zhang Dingmin.

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