They were two investing whales, well known to each other but invisible in the market except for the price moves in their wakes — sometimes as they snapped up the same stocks.
One of their names became famous this year: Bill Hwang, whose Archegos Capital Management spectacularly collapsed amid revelations that it had borrowed enough to wield more than $100 billion in market clout.
The other, Tao Li, remains little known outside a circle of select investors who’ve long revered him as Mr. China for his expertise in that nation’s stocks. But the 41-year-old New York-based hedge fund manager is starting to attract harsher scrutiny.
As it turns out, Hwang and Li had both piled into the same Chinese online-education company, GSX Techedu Inc., amassing stakes that market participants estimate amounted to a total of about 40% of the shares. When Archegos’s portfolio racked up margin calls in March, banks rushed to liquidate its bets, sending GSX tumbling. Li’s Teng Yue Partners hedge fund, which manages $10 billion including leverage, took a hit and by the end of August was down about 32% for the year, according to people with knowledge of its performance.
How exactly Hwang and Li came to pile so heavily into the same stock is of intense interest to a handful of short sellers including Carson Block, famous for his bearish bets against Chinese companies. Short interest in GSX’s American depositary receipts reached about 33% in mid-2020. Such positions soured as the price more than doubled in January.
Critics are wondering whether the pair should have disclosed the massive stakes they were building. Some are questioning whether the overlapping bets might have somehow run afoul of securities laws.
Hwang and Li were, after all, longtime former colleagues and, at least before Archegos’s collapse, chatted periodically about investing ideas, according to people with knowledge of their relationship.
“I really, really hope the SEC looks at the trading in GSX,” Block said in a May interview with accounting firm Marcum BP, which posts articles on areas in which it specializes, such as audits of Chinese companies.
Block, who had announced last year he was shorting GSX, questioned whether Archegos and others were trying to squeeze such positions. “Just can’t see that these guys went long GSX on such large size because they believed the fundamentals were so good,” he said.
Representatives for Hwang and Teng Yue declined to comment. Block declined to elaborate on his public comments when contacted by Bloomberg.
Authorities including the U.S. Securities and Exchange Commission and Department of Justice have been poring over what happened at Archegos and at the banks that provided its leverage, and so far, the government hasn't accused anyone of wrongdoing. SEC Chairman Gary Gensler told Congress in May that stiffer disclosure laws may be warranted for investment firms after the Archegos episode, and he’s since signaled plans to make more industry data publicly available.
Among a select group of U.S.-based investors, no research on potential stock bets in China is complete without first conferring with Beijing-born Li. His hedge fund is armed with about $4 billion in capital, according to investors, which would make it one of the biggest in the U.S. focusing solely on the world’s second-largest economy. People close to the firm described its performance and policies to Bloomberg on the condition they not be named discussing confidential information.
Admirers say his reputation is well-earned: Several times a year he spends four to six weeks on the mainland researching domestic companies — everything from technology and consumer products to health care, solar energy and agriculture. That digging has paid off. His fund has posted annualized returns of almost 30% for the past decade, the people close to the firm said.
By January, Li had taken an intense interest in GSX, amassing a position that was unusually big even among Teng Yue’s concentrated bets. At one point that month, as the stock rocketed, GSX accounted for about 40% of the fund’s portfolio, according to people familiar with the holdings.
As Hwang shifted Archegos’s portfolio in 2020 to include several Chinese companies, he discussed potential investments with Li, people familiar with the two men said.
Hwang ramped up his stake of Chinese ADRs in September of last year, though it’s unclear how large his bet on GSX got. The holding was significant enough that when banks unraveled Archegos’s portfolio — erasing some $20 billion of Hwang’s fortune in just two days — shares of GSX fell by more than half.
Li later suffered further blows to his portfolio of Chinese stocks when President Xi Jinping launched an unexpected crackdown on some of the industries the money manager had targeted, such as online education, ride-hailing and trucking on demand.
Chinese mainland indexes are up less than 3% this year, and the shares that trade stateside have tumbled 34%. Investors say that even Mr. China couldn’t have foreseen how swiftly and aggressively the government might rein in some types of business.
Tiger Pedigree
Li’s struggles in 2021 contrast with his unlikely rise to running a multibillion-dollar fund. He arrived in the U.S. from China more than two decades ago to study at Claremont McKenna College. At the time, he was trying to master English and suffered from homesickness, according to a tribute he wrote for a professor at Claremont who died last year. Li is now a trustee at the school.
After a two-year stint at JPMorgan Chase & Co. as a technology, media and telecommunications investment banking analyst, he joined Hwang’s Tiger Asia in 2004 to cover Chinese companies. That move introduced Li into the tight-knit Tiger world — the group of portfolio managers trained by hedge fund legend Julian Robertson. Li even joined the Tiger Foundation board, the philanthropic organization of Robertson and his so-called Tiger cubs.
Hwang had started Tiger Asia a few years before, after Robertson was forced to close his firm following losses and client withdrawals. Hwang was already known as an aggressive investor, taking big, concentrated bets. For a while, he was one of the more successful cubs to come out of Robertson’s shop, but things started to change in 2008, when he got stuck in a short squeeze of Volkswagen AG. He ended the year down 23% and many investors pulled out, furious that an Asia-focused fund was gambling in European markets.
Then came Hwang’s legal troubles. In 2012, after years of investigations by authorities in the U.S. and Hong Kong, the U.S. Securities and Exchange Commission accused Tiger Asia of insider trading and manipulation in two Chinese bank stocks. The agency said Hwang’s firm “crossed the wall,” receiving confidential information about pending share offerings from the underwriting banks, and then used that knowledge to reap illicit profits. Hwang settled that case without admitting or denying wrongdoing, and Tiger Asia pleaded guilty to a Department of Justice charge of wire fraud. Hwang closed his firm and opened Archegos, his family office.
Li, who left Tiger Asia in 2011, opened Teng Yue, which means leap or soar, the same year, and by early 2012 he was managing $40 million. His anchor investor was East Rock Capital, a family office in New York. The firm has grown mostly through investment gains rather than aggressive money-raising, and his client base is heavily weighted toward family offices, endowments and foundations. Noteworthy investors also include Scott Shleifer, who heads the venture unit of Tiger Global, one of the most successful offshoots of Robertson’s empire, according to people familiar with the matter.
Erasing Gains
People who know Li describe him as quietly formal — more suit and tie than a fleece or half-zip sweater — and say his cool demeanor is such that you wouldn’t know on any given day if he was significantly up or down. He has told people it was painful to watch Hwang’s downfall and he had learned firsthand the dangers of hubris.
That makes this year’s turn of events especially puzzling. Even some fans question his love affair with GSX. He started buying it in 2020, around the time that Block’s Muddy Waters Research and other activist short sellers started calling the company a fraud. In February of that year, Grizzly Research questioned GSX’s results. Then in April Citron Research accused the company of overstating revenue by as much as 70%. In early May, Scorpio VC concluded the financial data “is not up to the test.” Block estimated that at least 70% of its users were fake.
GSX said in its most recent annual report in April that it’s cooperating with an SEC inquiry into issues raised by short sellers. It noted that an independent internal review was mostly complete and hadn’t found any evidence that would significantly impact the company’s past financial statements.
Li told confidants that he spent more than $2 million researching the company and he insisted it was legit, according to people with knowledge of the conversations.
Still, Li and Hwang’s enthusiasm for GSX was largely invisible to the outside world because they had taken the positions using total-returns swaps that don’t usually need to be disclosed in quarterly regulatory filings.
The SEC’s Gensler said the agency may change the rules to ensure hedge funds reveal such positions in the future.
The stock more than doubled in January, helping Li’s hedge fund gain 36% that month. On the back of a 70% gain in 2020, he was on a roll and renegotiated terms with clients, giving himself more leeway to lock up their capital, according to people with knowledge of the new policy. But as Hwang’s portfolio imploded in March, Teng Yue was forced to unwind some of its bets too. That fueled an almost 30% loss that month and erased all the profits the fund had made so far in 2021.
GSX wasn’t the only overlapping position. Li and Hwang also held Vipshop Holdings Ltd., a Chinese online discount retailer, according to one market participant. That company, too, was popular with short sellers. While the exact percentage of the pair’s holdings is unknown, the banks they dealt with as their brokers accounted for about 14% of the outstanding shares.
Opaque Positions
Privately, investors have also questioned the use of swaps in amassing such a large stake, and whether the position should have been disclosed.
The answer depends on motive, said Joshua Mitts, an associate professor at Columbia Law School. Swaps aren’t considered equity ownership and so investors don’t have to disclose them in quarterly filings as they do other U.S. shares. “Yet using them as a strategy to circumvent disclosure rules is a violation of the law,” Mitts said.
The unloading of some names during Hwang’s meltdown may actually have saved Li an even bigger hit months later, according to bankers. By July, Beijing had banned certain for-profit online education offered by GSX (now called Gaotu Techedu) and TAL Education Group, another big Teng Yue position. Tao’s fund lost 21% in July alone.
The Chinese government also stepped up oversight of its ride-hailing and on-demand trucking companies from Didi Global Inc. to Full Truck Alliance Co., both companies that Teng Yue invested in before they went public. In late July, the SEC halted IPOs by Chinese companies until they boost disclosures of risks posed to shareholders, such as potential future actions by the Chinese government that could hurt performance.
One piece of good news for Li is that his decision to lock up client money longer means they can’t immediately flee despite the losses.
–With assistance from Sridhar Natarajan and Nishant Kumar.
This article was provided by Bloomberg News.
