ETF managers frustrated after Kuaishou slump stokes fears that tech IPO fever could sink H-share returns

Name: What is Kuaishou? Understanding China’s video-sharing app
Uploaded: 2021-09-13T03:00:17.000Z
Duration: 2 min 1 s
Description: What is Kuaishou? Understanding China’s video-sharing app

Fast-track rule for Hong Kong’s H-share index raises concerns among managers that ETF performance could be hit by tech sector slump

Kuaishou’s 73 per cent plunge has been biggest recent drag on index, sinking returns for the US$622 million of funds that track benchmark

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A signage for Kuaishou Technology is seen outside its headquarters in Beijing. The company’s shares have plunged 73 per cent since its inclusion in February into the Hang Seng China Enterprise Index. Photo: Bloomberg

Georgina Lee

Published: 11:00am, 13 Sep 2021Updated: 12:30pm, 13 Sep 2021

A tweak to the Hang Seng China Enterprise Index that enables listing debutants to become eligible for fast-track inclusion has contributed to an 18.7 per cent decline in the index since February, leading to negative returns for some of the US$622 million worth of exchange-traded funds that track the benchmark.

Since a “fast entry rule” was introduced in October 2020 enabling sizeable new listings to fast-track their admission into the index on the 11th trading day instead of waiting till the index’s quarterly rebalancing, short video platform Kuaishou Technology was added to the benchmark that tracks 50 leading Chinese companies listed in Hong Kong. JD Health, also unprofitable, was added last December via the fast entry route.

But Kuaishou’s 73 per cent plunge since its inclusion has caused some fund managers to question whether the new rule has exposed investors to significant underperformance and higher trading costs.

Given that many of the ETFs that track the index are backed by the retirement savings of the city’s residents, some fund managers are questioning whether further “hot” tech stocks slated for IPOs, especially those that are not profitable, should be eligible for fast-track inclusion. Other unicorns that could get listed in Hong Kong in the near future include ByteDance , Kuaishou’s bigger short-video rival.

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What is Kuaishou? Understanding China’s video-sharing app

“Kuaishou’s early addition to the benchmark means that all the portfolios that track the index had to buy the stock at a high level. Now, with the stock down around 70 per cent seven months later, its impact on the index will be mirrored directly by the performance of these funds,” said Govert Heijboer, co-chief investment officer of hedge fund manager True Partner Capital.

The IPO frenzy was highlighted by Kuaishou, which raised US$5.4 billion from its public offering ahead of its debut on the Hong Kong stock exchange in February, which valued it at HK$1.23 trillion (US$159 billion).