Canadian hedge fund faces $3 billion loss

According to recent media reports published in China, Toronto-based hedge fund BHP International Markets Ltd. is sitting on losses of as much as $3 billion after taking a short position on $1.2 billion worth of Hanergy Thin Film Power (00566.HK) shares, which have risen of late.

The hedge fund is headed by Scott C. Dorey, a former senior investment banker at Lehman Brothers in New York, and took out short positions from Nov 2012 to Jan 2013 at a price of HK$0.2 to HK$0.5, according to China Securities Journal. Since then, Hanergy's stock price has soared to a record high of HK$ 9.07 on March 5 before settling down to a close of HK$6.61 on March 18. With the clock ticking to close their position by the end of the year and with a relatively small free-float of available shares, BHP could be forced to pay a premium of HK$12 to HK$20 per share, resulting in losses of up to $3 billion.

Hanergy is now the biggest clean energy enterprise in the world, with a market value cap more than 5-times that of leading U.S. solar firm, First Solar. It is engaged in the production and development of thin-film solar panels. Its surprising stock rise has come amidst a rising tide of public concern in China about environmental issues and interest in clean tech stocks. Since the beginning of the year, its share price has rocketed 135 percent, driven in part by its status as the most-traded stock in the Hong Kong-Shanghai Stock Connect program. Through the connect, Hanergy has gained net inflows of $400 million over the past two months, the most of any participating stock and 6.6 percent of total turnover of the period.

Chinese media reports have highlighted desperate measures taken some short sellers have taken to tamp down Hanergy's share price. Hong Kong Next Magazine recently reported that a group of hedge-fund managers from the U.S. had flown to Hong Kong to meet with media outlets in an attempt to drum up negative news reports about Hanergy. China Securities Journal reported that some mainland investors had their Hanergy-backed share-pledge loans reduced to a rate of zero by a British bank with offices in Hong Kong. The practice was unprecedented, according to reports, and could have been orchestrated by short sellers looking for gains from a massive stock sell off.

Despite the short positions held by BHP and other firms, Hanergy's strong market position remains intact, according to the media reports. As the company develops its downstream businesses and explores the consumer market, the upside growth potential is great; which is bad news for short sellers.