June 8, 2017 / 6:43 AM / 4 months ago

Hong Kong draws short straw at hedge-fund jamboree

Carson Block, Chief Investment Officer, Muddy Waters Capital LLC., speaks at the Sohn Investment Conference in New York City, U.S. May 4, 2016. REUTERS/Brendan McDermid - RTX2CW32

HONG KONG (Reuters Breakingviews) - The hedge-fund industry has a miserable message for Hong Kong. The latest annual Sohn Hong Kong fundraiser heard a wide range of investment pitches, but when it came to the host city, two of the three were short-selling takedowns. And many local shares sold off beforehand on fears they could be targets. That is hardly a vote of confidence in efforts to clean up the market.

Hedgies pushed a variety of buy ideas at Wednesday’s gathering: Japanese blue-chips, turnarounds at Rolls-Royce and Peabody Energy, and a thesis involving Shankara Building Products, a small-cap that could become India’s Home Depot. Chinese recommendations included Sina and Momo, two social media firms with U.S. listings.

Meanwhile, veteran short-sellers Carson Block and Dan David laid into two locally listed firms, sofa-maker Man Wah Holdings and Dali Foods. Shares in both fell, and the next morning, Dali rushed out a lengthy riposte. Man Wah has halted trading ahead of its own rebuttal.

Whatever the individual merits, it’s discouraging that one of the main ways that smart money thinks it can outperform in Hong Kong is through betting against questionable companies. The sole positive recommendation was on mainland carmaker Great Wall Motor.

Man Wah and Dali Foods join a long list of recent short targets. On Tuesday Block said he would announce a new short target at Sohn, and around 50 stocks reportedly fell in response, implying widespread suspicion. There is something seriously amiss with a market that can imagine dozens of plausible potential short targets so quickly. It also suggests too many shares trade on speculation not fundamentals.

It is telling that Martin Wheatley, former chief securities regulator in the city, popped up to defend the role played by short-sellers in markets. Authorities have sometimes seemed to take a different view in recent years, coming down hard on the authors of two critical reports.

To be sure, Hong Kong by no means has a monopoly on dodgy companies. It is tightening up in various ways, getting tougher with underwriters and demanding quicker responses from firms to criticism. And some attacks may prove wide of the mark – two short-sellers are now feuding over Apple supplier AAC Technologies, for example. But the spate of criticism suggests it is still falling short.

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