Evergrande Shorts Are Back in Fashion

Consider the hedge fund manager’s dilemma. If all she has is $200 million to $300 million in assets under management, she’d barely be able to afford that swanky office and the half-dozen analysts she’d need to run the operation. So she works hard to establish a track record and begins to manage, say, $2 billion to $3 billion. At that scale, she has a different set of problems and sometimes has to short stocks to accommodate her ultra-long positions and appear to remain market neutral (she does run a hedge fund after all). But how does she come up with a good long-short portfolio that does that comfortably for her investors while retaining an edge?

Finding a convincing short — in the eyes of her investors — is no easy task. In an ever-rising market, there are few companies out there they’d comfortably wager against. What’s there to hate? For instance, if she pitches Jack Ma’s Alibaba Group Holding Ltd., endowment fund clients — with investment horizons of a decade or so — might respond by saying the anti-trust regulatory shoe has already dropped and everything is looking up for the company. China’s other tech giants, such as Tencent Holdings Ltd. and Meituan, are also among the largest holdings of the benchmark MSCI Emerging Markets Index. Best not to bet against passive fund flows.