Using 'The China Hustle' strategy in your portfolio?

Highly recommend watching the China Hustle on Netflix. A documentory about how small time companies in China are being packaged up and listed on the US stock market through fraud and deceptive accounting practices.

Still appears to be happening today. A real eye opener, and its worrying how easy it appears to be. They are essentially tiny businesses hiding behind shell companies, with inflated revenue to crazy numbers.

As a result, there has been a rise of activisit boutique US hedge funds who visit these companies in China (who are listed on the NASDAQ, NYSE etc and trading millions) and ‘debunk’ them with detailed reports showing the reality of these businesses.

Once the report is published, the share prices generally plummet. There are a few examples in the documentory, but I’ve also looked up the hedge funds mentioned, which are firms such as:

https://wolfpackresearch.com/
https://www.blueorcacapital.com/
https://www.muddywatersresearch.com/

… All of the above actually publish a lot of the reports for free, and it’s interesting the read through the PDFs to see their analysis and target prices for the ‘questionable’ companies.

From a portfolio perspective, I thought these companies could form part of a small allocation – e.g. under 5%, in the same bucket as crypto in an otherwise well balanced portfolio.

Maybe these are short positions worth holding?

I pulled all the shorts the above hedge funds have made public, and from what I could see from the Twitter feeds in 2019/late 2018. I know, it’s a very crude analysis but the fundamentals make a lot of sense if you’ve watched the documentary and read the PDFs in detail.

From what is public these companies are either in the trash, or heading towards it - and the recent correction could accelerate that process. The challenge I see is taking out the positions fast enough after the hedge funds publish new reports - most tank 30-60% very quickly!

I’ve signed up for the email alerts on the sites above, it’ll be interesting to see how quickly they communicate new short positions and if I can catch some in the future.

Here’s the current list I’ve added to my FT portfolio to track over the coming months, maybe I work up the guts to take out some real positions:

|Name|Symbol|Last Price|Last Price_Currency|

|Allakos Inc|ALLK:NSQ|62.33|USD|
|Ausnutria Dairy Corp Ltd|1717:HKG|12.58|HKD|
|Burford Capital Ltd|BUR:LSE|538.5|GBX|
|China Medical System Holdings Ltd|867:HKG|9.6|HKD|
|Corcept Therapeutics Inc|CORT:NAQ|12.62|USD|
|GTT Communications Inc|GTT:NYQ|15.14|USD|
|Kasen International Holdings Ltd|496:HKG|1.46|HKD|
|Luckin Coffee Inc|LK:NSQ|39.56|USD|
|NOVA Group Holdings Ltd|1360:HKG|1.51|HKD|
|PeptiDream Inc|4587:TYO|4,300.00|JPY|
|Qutoutiao Inc|QTT:NSQ|5.21|USD|
|Smart Global Holdings Inc|SGH:NSQ|26.84|USD|
|Solutions 30 SE|ALS30:PAR|10.03|EUR|

What do you think about adding these shorts to a portfolio?

Mark this post - I’ll pull the prices again in 3mths time :smiley:

2 Likes

This is a poor strategy. I happen to own stocks in a company who was previously attacked by MuddyWaters Research (TAL Education Group) back in 2018. The allegations proved false, the stock is at record highs.

Luckin Coffee is another company which was attached just recently on 31 January and this stock recovered within 24h after the papers were released.

I can’t say anything about other companies on that list, but if you invest in single stocks, it’s probably a good idea to know the company on a deeper level than its price chart.

3 Likes

Completely agree on the principles against stock picking, and this isn’t something recommended over investing in index funds. The above is nothing more than a test with a small ‘fun’ allocation of one’s portfolio, in a similar style to other threads like this and this.

And yes - look at a company beyond a price chart! Hence it’s important to read the analysis and research as I mentioned above. I highly recommend watching the China Hustle, it’s staggering how these companies are able to get listed on the likes of NASDAQ and yet have some questionable accounting practices behind the scenes, however it appears action is starting to be taken against this:

https://techcrunch.com/2020/05/19/following-multiple-scandals-including-luckin-coffee-nasdaq-ready-to-tighten-rules-on-ipo-listings/

The original list above has had some significant movement and gains from a ‘short’ perspective - Luckin Coffee, NOVA, Qutoutiao and GTT Comms have tanked between 47%-90% since March 1st, here’s the full list:

|Allakos Inc|ALLK:NSQ|67.80|USD| +9%
|Ausnutria Dairy Corp Ltd|1717:HKG|15.24|HKD| +21%
|Burford Capital Ltd|BUR:LSE|513.80|GBX| -4.5%
|China Medical System Holdings Ltd|867:HKG|8.8|HKD| -8.3%
|Corcept Therapeutics Inc|CORT:NAQ|14.60|USD| +15.7%
|GTT Communications Inc|GTT:NYQ|7.99|USD| -47%
|Kasen International Holdings Ltd|496:HKG|0.98|HKD| -32.9%
|Luckin Coffee Inc|LK:NSQ|3.89|USD| -90.2%
|NOVA Group Holdings Ltd|1360:HKG|0.15|HKD| -90.1%
|PeptiDream Inc|4587:TYO|4,780.00|JPY| +11.2%
|Qutoutiao Inc|QTT:NSQ|2.61|USD| -49.9%
|Smart Global Holdings Inc|SGH:NSQ|26.07|USD| -2.9%
|Solutions 30 SE|ALS30:PAR|10.75|EUR| +7.2%

1 Like

Interesting idea, I will watch the China Hustle documentary.
Luckin coffee was on all the news lately, even Credit Suisse made a 100 M$ loan to the founder! ( backed by company share :sweat_smile:)
Thanks to this case ( and to the trade war) US plans to subject all Chinese companies wishing to be listed on the US stock exchanges to scrupulous evaluation.

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