Hedge Fund Short Covering Fuels Demand in $5 Billion CATL Deal

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(Bloomberg) — Hedge funds bought the bulk of the shares in Contemporary Amperex Technology Co. Ltd.’s $5 billion placement, with at least some of the demand driven by traders seeking to cover short positions on the battery maker’s Hong Kong-listed shares, according to people with knowledge of the matter.

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The short positions were one leg of a popular trade that CATL’s more expensive Hong Kong shares would narrow their premium over those listed in Shenzhen. Hedge funds received more than $3 billion worth of the shares in Hong Kong’s biggest deal of the year so far, said the people who asked not to be identified discussing private information. 

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CATL shares have offered an unusual trade, as bets on the battery maker tied to soaring energy prices have driven the Hong Kong shares to a record premium over the Shenzhen listing — a rare constellation as the reverse is usually true for dual-listed companies. That gap fed a buildup of short positions, even as the stock has surged 139% since its Hong Kong debut last year.

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“CATL’s H-share premium over the last couple of months has reached levels never seen before,” Nick Bird, founder of Hong Kong-based quantitative hedge fund firm OQ Funds Management, wrote in a note Monday. “I’m accustomed to seeing large A-share premiums, but substantial H-share premiums are unheard of.” 

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Of about 160 dual-listed companies, about five have a premium for their Hong Kong shares as of Tuesday’s trading, with CATL’s being the highest.

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For the hedge funds in the CATL trade, the placement — priced about 26% above the previous close of the Shenzhen-listed shares and 7% below the Hong Kong ones — offered a way to cut losses or exit the trade flattish, said the people. Other hedge funds, which only put on similar trades when news of the upcoming placement started to swirl mid-month, now stand to make double-digit gains, said one of the people. 

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The demand to borrow CATL’s Hong Kong shares for short-selling is so high that some international banks are charging between 35% and 45% per year, said some of the people. Short interest as a percentage of free float rose to 26% as of Thursday, more than double the 12% level in December, according to data from S3 Partners. Borrowing costs have also climbed, while utilization, the ratio of lendable shares being borrowed for short selling, has stayed near 100% this month, highlighting the difficulty traders face in sourcing new shorts.

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The premium on CATL’s Hong Kong shares over the Shenzhen ones surged to an unprecedented 49% on March 20. That resulted in losses for hedge funds that have for months been sitting on simultaneous bullish positions in CATL’s cheaper Shenzhen shares and bearish positions in its Hong Kong shares.

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In that environment, the latest share sale offered a number of benefits for hedge funds in the trade. It created the conditions for a lower share price through its dilution effect and at the same time making more shares available for potential short bets. CATL fell as much as 9.2% in Hong Kong, its biggest intraday drop on record.

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The precise estimates of the amount of the placement shares that have gone to hedge funds vary by bank as the definition of “hedge fund” is often fuzzy. One thing is clear: Given the hefty premium CATL’s H shares have traded, long-only investors have been reluctant to buy the Hong Kong shares. Those bullish on the stock have the option to buy its shares across the border.

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