Hundreds of people watched a cheeky rescue unfold in Sydney's east on Saturday afternoon after a small boat got into trouble and started sinking during the Sydney to Hobart yacht race.

About 1.30pm, masses of spectators began to walk from South Head back towards Watsons Bay after watching the fleet of more than 100 yachts depart Sydney Harbour for the annual race.

At first, Chris Pearce thought the boat was coming in to drop someone off. Credit:Christopher Pearce

As the crowds passed Lady Bay Beach, which caters to nudists, some began to giggle.