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Consider the hedge fund manager’s dilemma. If all she has is $200 million to $300 million in assets under management, she’d barely be able to afford that swanky office and the half-dozen analysts she’d need to run the operation. So she works hard to establish a track record and begins to manage, say, $2 billion to $3 billion. At that scale, she has a different set of problems and sometimes has to short stocks to accommodate her ultra-long positions and appear to remain market neutral. But how does she come up with a good long-short portfolio that does that comfortably for her investors while retaining an edge?
Finding a convincing short — in the eyes of her investors — is no easy task. In an ever-rising market, there are few companies out there they’d comfortably wager against. What’s there to hate? For instance, if she pitches Jack Ma’s Alibaba Group Holding Ltd, endowment fund clients might respond by saying the anti-trust regulatory shoe has already dropped and everything is looking up for the company. China’s other tech giants, such as Tencent Holdings Ltd and Meituan, are also among the largest holdings of the benchmark MSCI Emerging Markets Index. Best not to bet against passive fund flows.
But then there’s China Evergrande Group, the country’s most indebted real estate developer at a time Beijing is tightening the screws on mounting corporate debt. Billionaire founder Hui Ka Yan is trying to do everything right. The backdrop to Evergrande’s annual conference with strategic partners in early June was painted red to resemble China’s flag and add a touch of patriotism. Hui promised to meet at least one of China’s new regulatory borrowing limits, known as the “three red lines,†by the end of the month. He’s also been buying back shares of his Hong Kong-listed stock even as it tumbles back to lockdown lows. But it’s much ado about nothing. Despite all of Hui’s efforts, Evergrande remains one of the most hate-able names on the Hong Kong bourse, if one goes by the amount of short selling on the stock. Over the years, hedge funds have swept in again and again to bet on its decline. It’s an easy narrative for our hedge fund manager as she explains her short strategy to clients.
Even when he tries to disprove that perception, Hui gets in his own way. At the June conference, he huddled with his business tycoon friends to show he’s still got powerful allies supporting his empire. But that only provided evidence of his very narrow investor base. From bond to stock offerings, electric vehicle to property management ventures, Evergrande has relied on the same small niche of tycoons for financing. What if, one day, one of them decides to drop out?
Suning Appliance Group, an Evergrande’s supplier that helped Hui avoid a cash crunch last fall, became distressed itself. It proposed a last-minute, two-year extension of a 2.9 billion yuan 7.3% private bonds due the next day, according to Debtwire. Meanwhile, its Shenzhen-listed Suning.com Co said in a filing that a Beijing court had ordered a three-year freeze in a stake owned by its controlling shareholder and founder Zhang Jindong, one of Hui’s tycoon friends. A friend in need cannot to be a friend in deed if he’s in liquidity stress.
—Bloomberg