Asia hedge funds including Long Corridor Asset Management Ltd. bought shares of sanctioned Chinese telecommunications operators, trading against a market sell-off.
Long Corridor acquired a small amount of shares, Hong Kong-based Chief Investment Officer James Tu said. At least three other Asia-based managers also purchased shares, lured by handsome dividend yields offered by the already undervalued stocks, said people with knowledge of the matter, who requested not to be named because the matter is private. The four hedge funds manage about $8 billion collectively.
The dumping frenzy created a buying opportunity for hedge funds seeking to profit from volatile markets in the twilight days of Donald Trump’s presidency. U.S. investors are barred from backing companies deemed to be controlled by China’s military, part of Trump’s wider effort to clamp down on the world’s second-largest economy.
MSCI Inc. and S&P Dow Jones announced last week they would drop Hong Kong-traded shares of China Mobile Ltd., China Telecom Corp. and China Unicom Hong Kong Ltd. from benchmarks. That prompted index-tracking funds to unwind positions at short notice, pushing the shares’ trading volume to 18 times the daily average of the previous three months. The world’s largest money manager BlackRock Inc. also reduced its holdings and plans to keep selling, a person familiar said.
“The technical selling that culminated on Jan. 8 provided an entry opportunity on these telecommunications names which are already beaten down,” said Tu, whose $220 million hedge fund returned 46% last year.
Shares of China Unicom sank as much as 11% in Hong Kong on Friday, while China Mobile and China Telecom dropped around 10% during trading hours. The companies have since recovered, partly helped by mainland investors.
The “impact of U.S. investment ban could be largely done,” Jefferies analysts led by Hong Kong-based Edison Lee wrote in a Jan 10. report, adding that mainland buying accounted for about 28.5% of trading volume on Friday.
China Mobile offered a 7% dividend yield and China Telecom 6%, greater than the MSCI World Index yield of about 2%. China Mobile may boost shareholder returns via raising dividend payouts or share buybacks, according to Bloomberg Intelligence analyst Anthea Lai.
“We don’t mind holding this for a longer time, but short-term, we also think there is a chance that U.S.-China relations would improve and many damaging tactics would be reversed, although we are not relying on that to happen,” Tu said.
Even if the policies are not reversed, U.S. investors who owned shares before the sanctions took effect have until November to sell their positions. Non-U.S. investors can continue to trade those stocks. One of the hedge funds put the holdings in a special purpose vehicle open only to non-U.S. investors to comply with rules, said a person.