Short sellers miss Tencent’s US$250b party

HONG KONG: If there is an upside to a downturn, it is that short sellers get to make a buck.

By borrowing shares, investors can sell what they don’t own. If the price falls, they buy the stock back at a cheaper level and return it to the lender (with interest), pocketing the difference. Assuming the shares fall enough and borrowing costs aren’t too high, a short seller can make a tidy profit while other investors lose money.

Many company executives hate this process — and the people who engage in it — possibly to the point of indulging in wayward (and expensive) tweets.

Yet if a large, high-flying and well-known company falls 44 per cent from its peak, you might expect to see hedge funds and short sellers popping a lot of champagne.

Except if that company is Tencent Holdings Ltd.

Despite the fact that China’s predominant purveyor of social media lost more than US$250 billion (RM1.04 trillion) of market value in the past nine months, short sellers were few and far between.

If you look at this one-year chart from Markit — which shows shares shorted as a percentage of those outstanding — it’s clear that short interest is waning. Sure, there’s been a small spike in the past couple of weeks, but the trend is clear.

Less than 0.3 per cent of all outstanding shares in Tencent are shorted, according to data compiled by Markit. The highest that level reached in the past year was a mere 0.48 per cent in November. (By comparison, short interest in Alibaba Group Holding Ltd stands above three per cent.)

That’s a lot of money left on the table by short sellers who could have made a killing.

If we zoom out a little and take a look at the shorting action over a five-year horizon, something even more interesting is revealed: Short interest peaked two years ago, after a roller-coaster period, and has been charting a straight line south since then.

One possible reason is rebalancing coupled with fund outflows from Hong Kong exchangetraded funds. Investment advisers, who manage funds on behalf of others, account for 35 per cent of disclosed holdings in Tencent, according to data compiled by Bloomberg. Another set of data tracked by Bloomberg shows that Hong Kong ETFs (exchange-traded funds) experienced a 13.3 per cent outflow over the past year.

Tencent occupies a unique position on investors’ radars. It’s a rare Greater China technology stock that’s listed in a developed market but not the United States. If your fund remit is to track tech, emerging markets, Greater China, big cap, or non-US-listed shares, then you probably need to put Tencent in your portfolio somewhere. Throw in the internet giant’s “star power” of a year ago, and it wouldn’t be surprising to find some fund managers were overweight.

ETFs account for 16.6 per cent of the Tencent stock held by funds, a proportion that’s risen by a third in the past three years. That’s second only to emergingmarket funds, which are also often passively managed, with holdings tied to an underlying benchmark. Interestingly, hedge funds own just 0.07 per cent of the stock.