Shanghai-Hong Kong stock connect scheme to lure hedge funds

Hedge funds may drive initial demand for Shanghai-listed stocks through a linkage of the city's bourse with that in Hong Kong, which opens up a new route for foreign investors to buy mainland shares, according to Goldman Sachs.

The link would tap into pent-up demand from hedge funds to buy yuan-denominated A shares in Shanghai, said Shane Bolton, the head of Asia prime brokerage at the New York-based bank. Long-only managers might grapple with pre-requirements that were different from their usual practice at the beginning, he added.

Foreign investors so far can only buy yuan shares listed on the mainland through the qualified foreign institutional investor (QFII) and the renminbi QFII programmes. The link, set to start next month, would allow investors, with or without their own QFII licences, to buy as much as 13 billion yuan (HK$16.4 billion) of Shanghai-traded yuan stocks a day, said a statement posted on the Hong Kong stock exchange's website.

"Stock connect will be a game changer for most hedge funds, allowing them to access A shares for the first time without having to use banks' QFII quota," Bolton said.

Few hedge funds have been able to win their own QFII licences, which are typically reserved for long-term investors such as mutual fund managers, endowments and sovereign wealth funds. Instead, hedge funds have been borrowing QFII quotas from banks to buy A shares with such quotas in short supply when demand is high.

Shanghai-listed stocks accessible to foreign investors through the link will account for about 90 per cent of the bourse's market value and 80 per cent of its average daily turnover, according to a May presentation posted on the Hong Kong exchange's website.

Investors have been betting the link will help narrow the pricing gap between the two exchanges. The Hang Seng China AH Premium Index advanced to 97.7 in May after the plan's initial announcement. It trades at 100 when prices between dual-listed shares are equal.