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Hedge funds dominated the $5 billion share placement by Contemporary Amperex Technology Co. Ltd. (CATL), with much of the demand driven by traders unwinding crowded arbitrage positions, according to Bloomberg.
The deal – Hong Kong’s largest equity offering this year – saw hedge funds take up more than $3 billion of shares, as many sought to cover short positions in CATL’s Hong Kong-listed stock. These shorts were part of a widely held trade betting that the premium between CATL’s Hong Kong (H-shares) and Shenzhen (A-shares) listings would narrow.
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Instead, that premium surged to unprecedented levels, reaching as high as 49% in March – an unusual dynamic given that mainland-listed shares typically trade at a premium. The dislocation led to mounting losses for hedge funds holding long positions in cheaper Shenzhen shares while shorting the more expensive Hong Kong stock.
The placement offered a timely exit. Priced at a discount to Hong Kong shares but above Shenzhen levels, the deal allowed some investors to reduce losses or close positions near breakeven. Others who entered the trade more recently were able to generate double-digit gains.
Market conditions around the trade have been extreme. Short interest in CATL’s Hong Kong shares rose to 26% of free float, while borrowing costs surged to as high as 45% annually, reflecting intense demand to short the stock.
The episode highlights the risks of crowded relative-value trades in volatile markets. It also underscores the growing influence of hedge funds in large capital markets transactions, particularly when positioning and technical factors drive demand as much as fundamental investment views.