Hedge funds wait for green signal to ride 'through train'

Hedge funds may drive initial demand of investing A shares through the Shanghai-Hong Kong Stock Connect, said market professionals.

The stock link would immediately attract hedge funds whose access to mainland shares is limited, while overseas mutual funds and pension funds tend to be more cautious and wait before making sure the program is in smooth operation, said Shang Wei, managing director of CITIC Securities international, to chinadaily.com.cn.

"We will invest A shares via the Stock Connect once the authority announces detailed rules regarding the capital gain tax," said Bill Tsai, the China head of Central Asset Investments, an Asia-focused multi-strategy hedge fund.

International investors so far can only buy A shares through the qualified foreign institutional investor (QFII) and the renminbi QFII programs, with both in preference of long-term investors, while the stock connect, also known as "through train", will allow all investors to buy up to 13 billion yuan ($2.12 billion) of Shanghai-listed stocks via Hong Kong Exchange a day.

"We are now investing A shares through QFII quota borrowed. Once the through train kicks off, some of the quota borrowed can be saved to invest other mainland assets such as Shenzhen-listed stocks," said Tsai.

Current eligible investments through the link include constituent stocks of Shanghai Stock Exchange 180 Index and SSE 380 Index, constituent stocks of the Hang Seng Composite LargeCap Index and Hang Seng Composite MidCap Index, as well as shares that are dual listed in the two bourses (A+H shares), according to a joint announcement by both sides.

What's more, hedge funds will not be the only major players, as Hong Kong-based brokerages and other market intermediaries are also warming up to be ahead of the game.

"The most likely initial investors under the scheme will be hedge funds and retail participants, those that traditionally have not been able to get direct access to the A-share market. We are definitely seeing demand," said Fidessa, a trading solution provider, in a written reply to chinadaily.com.cn.

The company just launched a unified platform for access to Shanghai-Hong Kong Stock Connect and the QFII and RQFII programs, allowing customers to manage positions along with advanced trading tools such as algorithms to navigate the A shares from Hong Kong.

"In the future, we expect to see more long-only participation as issues with beneficial ownership, taxation and settlement are resolved," said the company, adding that many long-only funds may struggle with the requirement for pre-delivery of shares from the custodian to the broker prior to the execution of a sell order.