Short Sellers Make a Fortune on China Stocks in Historic Selloff - Yahoo Finance

(Bloomberg) -- Betting against Chinese equities trading in the US and Hong Kong has been a winning strategy all year, but last week was a uniquely great time to be short the stocks amid a record meltdown.

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Traders took in $4.4 billion of month-to-date mark-to-market profits, a 7.5% return on an average short interest of $59 billion, when a brutal selloff hit the group on Oct. 24 and 25, according to a report from financial analytics firm S3 Partners on Friday. The vast majority of short positions were money makers, with 74% of the 1,645 shorted stocks profitable for short sellers and 92% of every dollar shorted producing a positive return, according to the data.

“You did not have to be a great investor,” said Ihor Dusaniwsky, managing director of predictive analysis at S3. “It was just that you picked the sector to be shorted and picked the biggest names.”

The downward pressure was driven by the uncertain macro picture following China’s leadership reshuffling. Last week, US-listed China stocks saw a record drop of 14%, while their Hong Kong peers had their worst slump since 2008.

The short-selling was broad based, sweeping from some of the top players in the sector to the bottom tiers, he said. Over the two-day stretch, the most profitable shorts were in the American depositary receipts of Alibaba Group Holding Ltd., Pinduoduo Inc. and JD.com Inc. in the US, as well as the Hong Kong traded stocks of Ping An Insurance Group, Tencent Holdings Ltd. and Meituan.

What’s more, the bearish bets could continue as the downward price trend remains in the region, according to S3. However, the market may could also see a “sudden and abrupt” end to new short bets and a return to short covering if the group makes a U-turn, the report said.

“Because there are such huge recent mark-to-market profits, a lot of shorts will be looking to close quickly to realize and pocket the gain before that disappears, if the market in general shoots up,” Dusaniwsky said.