Hedge Funds Bet Big Against Evergrande a Day Before Stock Soared

(Bloomberg) -- Hedge funds betting against the fortunes of China Evergrande Group got a reminder of why the indebted developer was once Hong Kong's most painful short.

After steadily reducing wagers against Evergrande shares in recent months, hedge funds and other short sellers rushed back into the trade last week -- just in time to get burned. They nearly doubled short interest in Evergrande's stock on Sept. 29, a day before the developer rallied 19% on abating concerns over a cash crunch, data compiled by IHS Markit Ltd. showed.

It's not the first time Evergrande has battled speculators and won -- in 2017, the company spent billions in a buyback spree that squeezed short sellers who had publicly targeted the stock. The shares ended that year with a 458% gain, making it the top performer on the 485-member Hang Seng Composite Index.

“It's not an easy stock to short,” said Castor Pang, head of research at Core Pacific-Yamaichi International HK. “But it's too early to say short sellers will lose this battle -- liquidity remains a big problem for Evergrande. It still hasn't been able to fix the debt issue after so many years.”

After a turbulent end to September that had banks, creditors and senior government officials alarmed about the company's balance sheet, an agreement reached with key stakeholders has helped Evergrande shares stabilize this month. Trading in its onshore bonds, which last priced Sept. 30, will resume Friday after a holiday in China.

Short interest was about 18.5% of free float as of Monday, the highest since April 2019, IHS Markit data showed. It reached 27% in mid 2018. Billionaire founder Hui Ka Yan owns more than 70% of Evergrande's outstanding stock, according to exchange data compiled by Bloomberg.

There are so few Evergrande shares readily available that traders would need about 12 days to cover their bearish bets -- or buy back borrowed stock to close out an open short position. That increases the risk of a short squeeze, when hedge funds are forced to liquidate their positions at increasingly higher prices.

©2020 Bloomberg L.P.