Burbank’s Passport Trims $500 Million China Internet Bet

John Burbank’s Passport Capital LLC is paring its more than half-billion dollar wager on Chinese Internet companies.

The $3.9 billion hedge-fund firm sold 3.29 million shares of real-estate portal operator SouFun Holdings Ltd. last quarter, more than 25 percent of its position, according to a filing last week with the U.S. Securities and Exchange Commission. It also trimmed investments in Sina Corp., owner of China’s largest Twitter-like service, online classifieds provider 58.com Inc. and web-based fashion retailer Vipshop Holdings Ltd.

Passport, a contrarian investor lured by the industry’s lack of correlation with U.S. and global growth, is trimming bets on high volatility stocks as it adjusts to what it considers an underestimation of the potential for broader market turmoil, according to a second-quarter letter to clients, a copy of which was obtained by Bloomberg News. Traders have been drawn to companies that cater to the world’s largest pool of Internet users even while such bets are considered more risky.

“Internet stocks, Chinese or otherwise, are inherently more volatile than the market,” Larry Haverty, a money manager at Gamco Investors Inc. in Rye, New York, said by e-mail. “The Chinese and Hong Kong markets are more volatile than ours. That said, the fundamentals of the Chinese market are quite strong.”

Risk Underpriced

Passport sold about 678,000 shares of Shanghai-based Sina, 600,000 shares of 58.com and 201,000 shares of Vipshop in the three months through June, SEC filing data show.

Steve Bruce, a spokesman for the San Francisco-based hedge fund at ASC Advisors LLC, declined to comment on the money manager’s holdings.

The $1.7 billion Passport Global fund had 155 long positions and 153 short bets at the end of the second quarter, with gross exposure of 215 percent of net asset value. While the firm remains bullish on China’s Internet companies, it is reducing exposure to stocks that are more sensitive to changes in market performance because investors may be miscalculating the risk for a selloff.

“Given our view that risk is underpriced, we anticipate contracting gross exposure on both sides during the third quarter. We have already started to do this with some trims in China Internet,” Burbank said in the investor letter. “Carrying less exposure to highly volatile, high beta stocks should enable us to carry a less aggressive short book.”

Hedge funds are largely unregulated pools of capital that can bet on falling as well as rising asset prices.

Higher Volatility

The 30-day historical volatility on the KraneShares CSI China Internet Fund, an exchange-traded fund that tracks web companies with listings abroad, has jumped 66 percent from a low in June to 23.66 yesterday. The measure of price swings for the iShares China Large-Cap ETF, the biggest Chinese exchange-traded fund in the U.S., was 16.84 on Aug. 21.

Passport still owned more than $560 million of shares in Chinese e-commerce companies at the end of June after the divestitures, data compiled by Bloomberg show.

The holdings included a 2.8 percent stake in Guangzhou-based Vipshop. The company’s shares have surged 605 percent since March 2013, when the hedge fund first reported holding the stock. Its shares soared 26 percent in the second quarter while Beijing-based SouFun tumbled 28 percent.

Qihoo Bet

Passport added about about 400,000 shares of Qihoo 360 Technology Co., the owner of China’s second-biggest search engine, in the period, bringing its stake to more than $150 million.

“We believe Qihoo is very cheap for its growth rate, not well known, and an emerging leader with a business model that is something they’ve pioneered and that therefore is unfamiliar to U.S. investors,” Passport said in the letter. “They are far more innovative and technologically driven than competitors like Baidu, but are still not well understood.”

The Bloomberg China-US Equity Index climbed 0.4 percent to 116.36 at 9:31 a.m. in New York. The Shanghai Composite Index rose 0.5 percent at the close today. KraneShares’s CSI China Internet Fund has surged 51 percent in the past year, more than triple the iShares China Large-Cap ETF.

“Given the run that these stocks have had since the second half of last year, their valuation seems stretched, and for that reason I agree that they’re quite risky,” Arjun Jayaraman, a money manager at Causeway Capital Management LLC in Los Angeles, said by e-mail Aug. 20. “If you do want to buy these stocks, you have to make sure that the valuation does not require you to make unreasonable assumptions about long-term growth rates or sustainability of margins.”

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