Hedge funds placed bets against China Evergrande, counting on its shares to plunge, just in time to get burned

Hedge funds nearly doubled their short interest in Evergrande’s stock on September 29, a day before the developer’s shares rallied 19 per cent
There are so few Evergrande shares readily available that traders would need about 12 days to cover their bearish bets

China property

Bloomberg

Published: 3:58pm, 7 Oct, 2020

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Hedge funds betting against the fortunes of China Evergrande Group got a reminder of why the indebted developer was once Hong Kong’s most painful short.

After steadily reducing wagers against Evergrande shares in recent months, hedge funds and other short sellers rushed back into the trade last week – just in time to get burned. They nearly doubled short interest in Evergrande’s stock on September 29, a day before the developer rallied 19 per cent on abating concerns over a cash crunch, data compiled by IHS Markit showed.

It’s not the first time Evergrande has battled speculators and won – in 2017, the company spent billions in a buy-back spree that squeezed short sellers who had publicly targeted the stock. The shares ended that year with a 458 per cent gain, making it the top performer on the 485-member Hang Seng Composite Index.

“It’s not an easy stock to short,” said Castor Pang, head of research at Core Pacific-Yamaichi International HK. “But it’s too early to say short sellers will lose this battle – liquidity remains a big problem for Evergrande. It still hasn’t been able to fix the debt issue after so many years.”

After a turbulent end to September that had banks, creditors and senior government officials alarmed about the company’s balance sheet, an agreement reached with key stakeholders has helped Evergrande shares stabilise this month. Trading in its onshore bonds, which last priced Sept. 30, will resume Friday after a holiday in China.

Short interest was about 18.5 per cent of free float as of Monday, the highest since April 2019, IHS Markit data showed. It reached 27 per cent in mid 2018. Billionaire founder Hui Ka-yan owns more than 70 per cent of Evergrande’s outstanding stock, according to exchange data compiled by Bloomberg.

There are so few Evergrande shares readily available that traders would need about 12 days to cover their bearish bets – or buy back borrowed stock to close out an open short position. That increases the risk of a short squeeze, when hedge funds are forced to liquidate their positions at increasingly higher prices.

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