HSBC HSBC Holdings PLC

By Mia Lamar 

HONG KONG -- Hedge funds that have been battered by Asia's rocky markets are taking a safe bet on Britain's surprise vote to leave the European Union: stacking up trades against shares of British banking giant HSBC Holdings Plc listed here.

Over 100 million Hong Kong-listed HSBC shares worth 4.64 billion Hong Kong dollars (US$594 million) were sold short on Friday, according to the Hong Kong stock exchange, representing over a third of the stock's total turnover and more than 12 times its average daily short selling activity in June.

On Monday, hedge funds continued to punish the stock, stacking up 1 billion Hong Kong dollars worth of bets on further declines, three times this month's average daily level, according to data provided by the exchange.

Hedge funds are betting against HSBC because as a big British bank it could suffer from the fallout of the country's move to pull out of the EU, and is also a large and easily traded stock, in a region where the markets can be thin and volatile.

The bearish bets dragged on the Hong Kong stock market on a day when most other Asian stock indexes bounced back from Friday's global market slide. Hong Kong's headline Hang Seng Index, which counts HSBC as its second-biggest stock by market capitalization, fell 0.2% on Monday. Japan's Nikkei 225 surged 2.4%. Shares in Australia rose 0.5%.

A spokesman for HSBC declined to comment.

Bets against the British banking giant are one of the few standout trades taking shape in Asia so far, following a closely watched vote that many of the investment world's most opportunistic funds sat out.

Battered by months of punishing market swings and unusual central bank policies, hedge funds have been keeping a lid on risky trading, particularly in Asia, where it is harder to take negative bets than in the U.S. and Europe.

Ahead of Friday's vote, hedge funds had slashed the overall exposure of their portfolio to rises and falls in Asian shares to a historically low level of 98.9%, according to Credit Suisse Group AG. That is well below levels of around 140% -- which reflects borrowed money -- a year earlier, before a sell off in Chinese stocks and surprise devaluation in the yuan currency roiled markets around the world.

The statistic underscores the cautious investing attitude at many hedge funds, after punishing moves in global markets.

"So much risk was taken off the table. As a result we are seeing very little follow up" on Monday, after Britain's vote to leave the EU, said Christopher Antonelli, a managing director in Nomura Holding's prime brokerage business, which provides financing and other services for hedge-fund clients.

Brokers for months have reported muted trading activity as investors have kept bets to a minimum. Hedge funds meanwhile are struggling to turn the corner after years of lackluster performance. Their investor base is becoming more conservative and less enthusiastic about sharp swings in returns.

"There's a little bit of survivorship to" the cautious investing stance, Mr. Antonelli said. "The whole hedge fund model is under a lot of stress."

Hedge funds that invest in Asia -- which are dominated by stock funds -- are down 2.1% in 2016, according to funds tracked by Eurekahedge. Peers that focus on the U.S. are up close to 2%, besting major U.S. stock indexes but lagging an index of high-yield corporate bonds.

Some investors say they believe a cautious approach to trading has been warranted, particularly on Friday, given the hard-to-predict nature of the British vote.

"This is the kind of time where if you just blindly follow a computer model it can be quite dangerous," said Lyle Pakula, chief investment officer of Melbourne-based hedge fund AE Capital, on Friday. "You don't go straight in on this."

Mr. Pakula said his fund would look for ways to trade the outcome over the next week.

Write to Mia Lamar at mia.lamar@wsj.com

(END) Dow Jones Newswires

June 27, 2016 08:50 ET (12:50 GMT)

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