Roll up! Roll up! It's the greatest lottery in the land, promising rich rewards for minimal risk. Well, that seems to be how initial public offerings, or IPOs, are viewed in Hong Kong and, to a lesser extent, elsewhere in the world. Last week IPO fever was highly visible after Milan Station Holdings made its trading debut following a record retail oversubscription of 2,179 times, beating the record set by Tianjin Port Development in 2006, which was 1,702 times subscribed. The response was reminiscent of the 300,000 investors who queued for Tom. com shares in 2000, when police were called in to keep order. Milan Station shares rose as much as 77 per cent before closing 65 per cent up on the first trading day - not bad for those who took a punt on a company that sells second-hand designer handbags. Now let's look at what happened to Tianjin Port, whose shares were offered at HK$1.88 and soared more than 26 per cent on the first trading day. Today you can buy these shares at comfortably below the offer price. The experience of Tianjin Port shareholders is hardly exceptional. Studies show that Hong Kong IPOs have almost all been aggressively underpriced, presumably to ensure a strong debut. A study by Anna Vong and Duarte Trigueiros, published last year, looked at 480 IPOs launched from 1994 to 2005. They found that underpricing was a predominant feature of these issues. Another academic study, by Agarwal, Liu and Rhee, published in 2004, looked at Hong Kong IPOs from 1993 to 1997 and confirmed the widespread underpricing thesis. It also showed that most of the shares that fared best initially performed badly over the longer run - something found in other markets. Fast-forward to last year, when Hong Kong led the world with new listings, raising a record HK$445 billion. Of these, there is an almost equal division between companies trading above and below their issue prices. This year, however, the record has been poorer, with fewer than half the new issues trading above their issue prices. In other words, investors keen to acquire many of these shares would have done better to have bought the shares in the aftermarket. However this, the punters say, is to miss the point, which is to 'stag' new issues - or get in and out as quickly as possible and take a quick profit, assuming a price rise on the debut. Yet an initial price pop is not to be taken for granted. Investors discovered this last month with the launch of Li Ka-shing's yuan-denominated Hui Xian Real Estate Investment Trust, which slumped 9.35 per cent when it made its debut. And, even if the share price rises when the shares are launched, the average investor is unlikely to see a dazzling profit. When an issue is really hot, as was the case with Milan Station, the allocation to smaller investors tends to be tiny relative to the overall subscription. It was, for example, estimated that for investors to get 2,000 shares in Milan Station, they would have needed to subscribe for 600,000, costing about HK$1 million. For investors with spare cash, depositing HK$1 million with a broker for a couple of weeks while the IPO is under way is no great hardship. But many punters have to borrow this from the bank and so have the additional burden of interest charges. Accounting for this expense, and the probably small allocation of shares, the final profit tally is less than the impressive figures that are bandied about in the wake of successful IPOs. There are more fundamental issues to be addressed, too. In pure stock market theory, new issues serve the purpose of providing companies with a fresh infusion of capital to improve their business. In practice, many IPOs are launched to enable existing shareholders to sell shares in the company and, to put it crudely, to cash out. The current massive Glencore offering looks like a case in point. This commodity trader had no obvious need for fresh funds, but its owners became stupendously rich as a result of the IPO. Investors should have asked why they wanted to buy into the company when its owners, some of the world's most savvy traders, were wanting out. IPOs are a time-honoured means of punting for smaller investors. Still, for anyone really keen on a longer-term investment, the Agarwal, Liu and Rhee study suggests the aftermarket often provides a better buying opportunity.