Hong Kong/Chinese short sellers can be excused for some high-spirited howling while celebrating the Year of the Dog during the upcoming Chinese Lunar New Year as the twenty-five most shorted securities were down -21.5% in February, more than twice the Hang Seng’s -10.4% decrease. This correction earned short sellers $13.8 billion in month-to-date mark-to-market profits in February.
February’s profits pushed twenty out the twenty-five stocks out of the red, these shorts were down $8.3 billion in January and are now up $5.4 billion year-to-date. This is unknown territory for many of these stocks as Alibaba was down $10.7 billion, Ping An Insurance was down $6.2 billion, and Tencent was down $3.2 billion in 2017. Investors, which used these short positions as either Beta hedges or Alpha generating positions, earned negative outperformance as the Hong Kong/Chinese blue chips took the brunt of the damage during February’s stock market correction.
Total short interest that we calculate in the Hong Kong/Chinese region is $92.4 billion, down $10.1 billion in February. While the top twenty-five most shorted securities make up 65% of total shorts, their short interest decreased by 76% as their stock prices slid further than the overall market and some shorts began buying to cover their positions to lock in profits.
While there may be some additional profit taking and shorts will close out more of their exposure, short interest in the most shorted Hong Kong/Chinese names will most likely scale up again as investors rebuild their Beta hedges as their portfolios grow and decide to increase their Alpha bets in the most liquid names in the market.
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Managing Director Predictive Analytics, S3 Partners, LLC
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