BlackRock and HSBC funds boosted Evergrande holdings as crisis loomed | Hacker News Reader

BlackRock and HSBC funds boosted Evergrande holdings as crisis loomed

ft.com

82 pointsbelter43 comments

> In a note to clients last week, UBS said: “We continue to hold Evergrande in fixed maturity funds because exiting the position at this point removes any optionality around a successful resumption in construction activity, external financial assistance, or policy adjustment in the coming months, and Evergrande bonds are now trading at or below typical historical recovery values”.

There's a twisted (but unsurprising) irony that professional investors who mock retail investors for "HODL" and "diamond-hands" strategies are perfectly fine with said strategies as soon as a government bailout is conceivable.

Sounds like their Machine Learning model failed because the training set was very small. It had only three items in the csv: "Fooled by Randomness","The Black Swan","Antifragile"

What's more, even at this moment, a bailout by Beijing is seen as the less likely scenario.

The bonds have an 9.5% coupon on them in a world of 0% rates, for a small portion of the portfolio, hardly a diamond hands strategy. The mark to market reval on these funds is barely 1% loss, and these bonds are priced at <25c to the $1.

https://www.bloomberg.com/quote/VPHUAUA:ID Value Partners Asian High Yield Fixed Maturity Bond Fund for example.

They already announced they aren't making their next interest payment, so the value of the "9.5%" coupon is almost certainly less than that.

The value of the coupon is still the same, the implied yield on the bonds is now >30% as defaults are now priced in.

Just hitting the wires China Evergrande main unit Hengda Real Estate will make coupon payments for onshore bonds due tomorrow - so those buyers at 30c of the bonds get an interest payment of 5c a few days later (and the bonds are probably worth more than 30c now).

Median recovery rates on defaulted bonds are around 25%, so you could probably buy these bonds on the belief they are going to default and make money.

Irrespective these funds are basically indexers - people want exposure to a diversified portfolio of High Yeild Asian bonds, inevitably you will have some shit in there that goes south.

> because exiting the position at this point removes any optionality around a successful resumption

HODL to the moon!

This sentences makes me laugh because its just HODL masked in some professional speak.

Probably will work out too

The Chinese government was the one who triggered this crisis (by their decision to not extend a financial accommodation), so it'll work out, but whom it works out best for is likely not going to be foreign investors. This is an orchestrated deleveraging of bad debt campaign.

"That is why Chinese regulators have decided to have a showdown with creditors over Evergrande. By convincing lenders that they will no longer stand behind large Chinese borrowers, they are trying to transform the country’s financial system by making Chinese lenders more reluctant to fund nonproductive investment projects. These projects generate what Chinese leader Xi Jinping, in an important recent essay for Qiushi (the leading official theoretical journal of the Chinese Communist Party) disparaged as “fictional growth,” in contrast to the “genuine growth” he called for. [1]"

[1] https://carnegieendowment.org/chinafinancialmarkets/85391

Further reading on China's "Three Red Lines" policy:

https://www.ubs.com/global/en/asset-management/insights/chin...

Feels like western markets have lots of "fictional growth" on the books lately. We'll see if/how that unwinds.

Sure, US equities are frothy but are backed by cashflows backed by a consumerist society in a mostly functioning democracy. China's real estate market are tulips more people collect than live in.

https://www.google.com/search?q=china+real+estate+occupied+v...

>US equities are frothy but are backed by cashflows backed by a consumerist society in a mostly functioning democracy.

"backed by" is doing a tremendous amount of work in that sentence. For some comparison, Evergrande is currently worth 2x GME.

> For some comparison, Evergrande is currently worth 2x GME.

True! But GME is not a representation of Gamestop's enterprise value at the moment (and therefore, a poor analogy); GME is currently a representation of a microcosm of equity market participants attempting to determine if there "less than fundamental" mechanisms at play (derivative/index based shorts, etc) on the security.

Following up, Evergrande will be broken apart and nationalized with foreign bondholders taking a haircut.

https://asiamarkets.com/imminent-china-evergrande-deal-will-...

Are they abusing the word optionality, or is there any way to read that that makes sense? Like what options does keeping the position open up?

If they are holders of debt, don’t get possibly get some vote on debt restructuring?

Payoff of the debt becomes like an option because it is floored at 0, but there is a chance they get something out of it. And it's not abuse of terminology, it's the technical way to describe that characteristic of distressed debt

but it's not, they talk of recovery values. HODL is "this will go big, you will see!" while the statement here is "we will get 25c on the dollar as bond holders, which is better than getting 24c by selling it on the market".

It's easy to "hodl" when you have friends who can rewrite the rules if you need it, even easier if your central bank friends can just print money to pump your bags.

Yep. In fact, it's the rational and prudent action. The more pedestrian "HODL" and "Diamond Hands" investors do not have any real political or economic clout and therefor carry much higher risk when pursuing the same strategies.

Sounds like someone chasing Russian bonds in 1997.

Good Luck UBS. You are going to need it.

There is a saying that pessimists get to be right and optimists get to be rich. While I agree that UBS is playing with fire, they are taking an optimistic role here and will likely continue getting rich doing it.

China has 80 million housing surplus. I mean.. I congratulate the optimists.

That's bloody good. The UK needs at least a million new homes, at an affordable cost. Maybe they can send them over to the UK.

It’s good to preemptively build housing for over a billion people. America should learn a thing or two from that (as we squabble for basic properties).

> There's a twisted (but unsurprising) irony that professional investors who mock retail investors for "HODL" and "diamond-hands" strategies are perfectly fine with said strategies as soon as a government bailout is conceivable

There's no irony here.

That's really apples and oranges. Meme stock investing is basically a collective pump and dump. GME trading at $400 or $200 is clearly ludicrous on the fundamentals. The underlying business is not significantly different than it was when it traded at $4. It's all fair game from a trading point of view, but it trader histrionics and has nothing to do with the business. Diamond handers are trying to hold on to their nebulously earned rewards. They have a lot to lose.

Evergrande is a huge company operating in an opaque market with a highly interventionist government looming over everything. Investors have essentially already lost most of their stake and are choosing between cutting their losses or holding on for a very possibly change in direction that makes them whole. There's a lot to gain and relatively little to lose.

In GMEs case it‘s not a pump and dump. People try to squeeze shorts, and successfully so. A dump would have send shares back down to $4 months ago.

That’s literally a pump and dump. They’re trying to pump the price of the stock to force shorts to repurchase shares, upon which they’ll sell.

This already happened in January but some people didn’t get the memo and still think it’s incredibly shorted

There's an old adage about emerging market investing, which I don't follow, personally.

Invest when there's blood running in the streets.

The idea is that when everyone's too scared of political risk, that might be the time to jump in.

In this case, the blood hasn't even started yet. Xi is determined to remake the economy even if there are drastic consequences, and Evergrande is the beginning of those consequences, not the end.

The original quote it seems is: "Buy when there's blood in the streets, even if the blood is your own." :-)

Hadn't heard that part. That's good.

I think the general idea is that everyone's scared of more bad news coming out, and you, intrepid investor that you are, determine that whatever is coming is already priced in.

I don't think that's true of China.

That advice only works if you're liquid (or can call in more capital very quickly). Most institutional investors are close to fully invested all the time because otherwise they miss out on all market gains. There are only a few specialized hedge funds which hold mostly cash and try to buy when there's blood in the streets.

I'm sure that's true, but any time an opportunity comes along, any fund has to ask "Is this better than something else we're holding?"

I believe this adage is about investing generally, not specifically about emerging market investing.

It would certainly have served you well in March of last year...

The one I like: the stock market is the only place where everything goes on sale and people leave the store.

“We continue to hold Evergrande in fixed maturity funds because exiting the position at this point removes any optionality around a successful resumption in construction activity, external financial assistance, or policy adjustment in the coming months, and Evergrande bonds are now trading at or below typical historical recovery values”.

That is almost poetic. Had to squeeze away a tear XD

High-yield funds invest regularly in bonds like these and they expect a good part of it to go south.

Financial Times, what happened to you.

Anyone know the typical amount each of the 1.5 million people deposited for homes that won’t be built with evergrande ? is it like $100 that tesla takes for solar or is it a integer percent fraction of the house price ?

I read that some percentage of homes have been paid for in full.

This could be a good or bad move depending on the details.

What is the price, what is the yield, is the debt secured by an asset, what is the risk reward.

Buying things that no else wants is sometimes the smartest move.

I’m short the Chinese construction market

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