Hedge Funds Salivate Over Arbitrage Trade in Alibaba

14 Nov 2019, 07:26 PM IST

(Bloomberg) -- An expected price gap between Alibaba Group Holding Ltd.’s Hong Kong and U.S. shares is fueling a colossal arbitrage trade.

In a Hong Kong sale of more than $10 billion, the Chinese e-commerce giant may offer a 5% discount to its New York-listed shares, according to media reports. Alibaba is scheduled to set a price on Nov. 20 and start Hong Kong trading on Nov. 26.

Several hedge-fund managers queried by ECM Watch are keen to take part in the arbitrage trade, which offers a relatively safe bet in a turbulent Hong Kong market. Buying Alibaba shares in the offering while shorting a similar amount of its U.S. stock could theoretically yield a return close to 5%.

Large Chinese companies tend to have very narrow price gaps between their Hong Kong shares and American depository receipts, Aequitas analysts wrote in a Wednesday note discussing the arbitrage trade.

“The only real money to be made from the listing will be the discount that it’s offered at versus its U.S. listing,” analysts led by Sumeet Singh wrote. “As soon as the deal is launched, the long-short investors are going to want to hedge whatever they think they might get allocated by shorting the U.S. listing.”

Some long-only Alibaba investors may also shift from their U.S. positions to Hong Kong shares to capture the discount, the analysts wrote.

Still, there is a risk of not getting enough allocation of shares in the offering to offset short positions. And if the price gap unexpectedly widens, investors may need to move their Hong Kong stock to the U.S. for short covering, raising their costs.

Alibaba’s listing would be the world’s largest this year if done before Saudi Aramco’s gargantuan sale, according to data compiled by Bloomberg.

UPCOMING LISTINGS:

Alibaba Group Holding
- Hong Kong exchange
- Size up to $15b
- Pricing Nov. 20; listing Nov. 26
- Credit Suisse, CICC
Postal Savings Bank of China
- Shanghai exchange
- Size $4.1b
- Taking orders Nov. 28
- Citic Securities, CICC, China Post Securities, UBS Securities
Pharmaron Beijing
- Hong Kong exchange
- Size up to $588m
- Pricing Nov. 21; Listing Nov. 28
- CLSA, Goldman Sachs, Orient Capital
China Zheshang Bank
- Shanghai exchange
- Size $1.9b
- Taking orders Nov. 14; listing date TBA
- Citic Securities
Heaven-Sent Gold Group
- Hong Kong exchange
- Up to $180m
- Pricing Nov. 18, listing Nov. 25
- CLSA
Bangkok Commercial Asset Management
- Thailand stock exchange
- Size at least $700m
- Listing date TBA
- Trinity Securities, Kasikorn Securities
Sinic Holdings Group
- Hong Kong stock exchange
- Size $269m
- Listing Nov. 15
- ABC International, Huatai Financial
Suntar Environmental Technology
- Shanghai Star board
- Size $227m
- Listing Nov. 15
- Changjiang Financing Services
Longyan Zhuoyue New Energy
- Shanghai Star board
- Size $191m
- Took orders Nov. 11; listing date TBA
- Yingda Securities

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China Merchants Commercial Real Estate Investment Trust starts gauging investor demand for Hong Kong IPO: terms
Home Control International drops as much as 9.8% in its Thursday debut after raising $16 million in Hong Kong
Sinic Holdings Group will trade in the gray market Thursday after raising $269 million in Hong Kong