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Most Profitable Q1 Investing Strategy? Identifying And Shorting Chinese Frauds

Tyler Durden's picture




 

The most profitable strategy of Q1 is shaping up to be, not surprisingly to Zero Hedge readers, identifying and shorting Chinese fraud stocks. As one of the premier hunters of reverse merger fraud, Kerrisdale Capital, notes, it generated an unbelievable 89.1% return gross of fees and 73.2% net, beating the performance of the S&P by about 68%. Since inception, the fund is up 299.5% net of fees and 405.6% gross of fees. Kerrisdale notes: "As one of the first funds to expose scams within the  U.S.-listed Chinese reverse merger universe, we benefited from our intimate knowledge of the sector. Most of the frauds exposed this quarter contributed to our returns in some shape or form, as did equity declines in many Chinese fraudcaps that were not exposed." Indeed, as we predicted back in November 2010, Chinese fraud hunting would soon be a pervasive and very profitable strategy. We hope many readers turned a profit as Zero Hedge tracked and pursued various frauds, and as our own internal "fraudcap" short bucket generated returns of over 30%. And since neither NYSE, nor Nasdaq, and certainly not the SEC cares one bit about investment integrity, we anticipate many more profitable days for those who focus purely on isolating market fraud. "The Chinese “fraudcap” space imploded this quarter. Chinese reverse merger stock scams were down anywhere from 10% to 80%, with many stocks down 50%+. On average, 1-2 frauds were exposed per week, with long, detailed reports put out by a wide variety of research firms, including Muddy Waters LLC, Glaucus Research, Citron Research, etc." Don't worry: there is plenty of it to go around.

Full report by Kerrisdale:

Kerr is Dale Letter

 

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Tue, 05/17/2011 - 10:11 | 1282751 NoBull1994
NoBull1994's picture

I'd like to know how they are valuing each of their shorts, and what their true ability is to realize these returns by covering or selling puts.

Tue, 05/17/2011 - 20:49 | 1285417 arthur darrell
arthur darrell's picture

they dont sell puts they buy them then exercise. you cant be subject to a buy in on a halted stock.if the shares reemerge on the pinkie sheets ( intended ) it is questionable if there is a need to close out the short stock but my guess is that will be when a buy in may occur , most likely for pennies.

Wed, 05/18/2011 - 06:14 | 1286357 ZeroPower
ZeroPower's picture

you cant be subject to a buy in on a halted stock.

Your put go out worthless if stock is halted and your expirty month was within that timeframe.

Short stock is the best bet, if youre willing to tie up that capital for months..

Tue, 05/17/2011 - 21:04 | 1285492 arthur darrell
arthur darrell's picture

value @ bid price = 0

Tue, 05/17/2011 - 10:14 | 1282752 Internet Tough Guy
Internet Tough Guy's picture

Remember when it was profitable to short American frauds?

Tue, 05/17/2011 - 11:14 | 1283035 Popo
Popo's picture

And it will be again.  All in good time ITG.... all in good time.

The people thinking that they've got the market 'completely rigged this time', and that it will 'go up forever'... are only feeling right because we've been on a 4-year run.  

4 years is not remotely long-in-the-tooth for a bull run.  But this too shall pass.  And when it does, the shorting opportunities are going to be one for the history books.

 

Tue, 05/17/2011 - 21:06 | 1285504 arthur darrell
arthur darrell's picture

P-u mean "one for the kindle", right? we no longer publish history books except those $200 new ones on college campuses

Tue, 05/17/2011 - 11:15 | 1283056 I am a Man I am...
I am a Man I am Forty's picture

or how about being double short real estate with that awesome ETF SRS?

http://finance.yahoo.com/echarts?s=SRS+Interactive#chart1:symbol=srs;ran...

Tue, 05/17/2011 - 10:15 | 1282756 AGORACOM
AGORACOM's picture

No doubt ... but babies are being thrown out with the bathwater, setting up some great opportunities for big gains on legitimate Chinese small-caps.  Here are some companies that I found and reported yesterday:

http://blog.chinasecurities.com/2011/05/chinese-small-cap-valuations-getting-crazy-now-4-pe-is-now-their-lucky-number/

Anybody else out there tracking oversold Chinese small-caps?

George ... The Greek ... From Canada

Tue, 05/17/2011 - 10:45 | 1282919 Boilermaker
Boilermaker's picture

Classic...when is the jerkey making machine and in-the-egg scrambler going to be pitched?

Tue, 05/17/2011 - 10:55 | 1282976 LFMayor
LFMayor's picture

Personally I'd like to see the Tadpole/pocket fisherman come back.  Hell, I'd buy another one as a companion for my 70's orig.

Tue, 05/17/2011 - 11:19 | 1283061 Boilermaker
Boilermaker's picture

Don't forget the never-dying 'worlds sharpest knife' and the litany of 'power juicers' out there.  All this guy needs is a covered wagon and flipped over barrel to stand on and he's in biz!

Tue, 05/17/2011 - 12:57 | 1283473 tired1
tired1's picture

How much is mandatory wagon insurance? Where does one get  a horse driver's license and how often does it have to go through emmisions testing?

Tue, 05/17/2011 - 13:05 | 1283505 tired1
tired1's picture

duplicate post

Tue, 05/17/2011 - 10:15 | 1282757 MonsterZero
MonsterZero's picture

Does it really matter if they were actually frauds or not? Profits all the same with bashing legit companies.

Tue, 05/17/2011 - 10:18 | 1282775 LRC Fan
LRC Fan's picture

DXY just tanked, Dow went vertical.  Go figure

Tue, 05/17/2011 - 10:18 | 1282789 AGORACOM
AGORACOM's picture

I find the "Future Returns" section most interesting.  In essence, the easy and fat money has been made.  Good on them for exposing and profiting from these frauds ... but have to think we are getting close to a point that going long on babies thrown out with the bathwater will return some equally impressive gains.

My call is that we see a bottom by Sept/Oct based on tax-loss selling ... followed by a big move in Q4 and well into 2012 ... all other things being equal.

George ... The Greek ... From Canada

Tue, 05/17/2011 - 10:22 | 1282828 JulianTrader
JulianTrader's picture

Yum-cha stocks, biatcheZ!

Tue, 05/17/2011 - 10:26 | 1282835 AGORACOM
AGORACOM's picture

Sorry guys ... ZH was displaying a "time-out" message, so I kept retrying.

Tue, 05/17/2011 - 10:28 | 1282842 AGORACOM
AGORACOM's picture

Sorry guys ... ZH was displaying a "time-out" message, so I kept retrying.

Tue, 05/17/2011 - 10:40 | 1282908 Boilermaker
Boilermaker's picture

The most profitable investing strategy is long REITS...all REITS.

It's literally the only death-defying-gravity-immune financial instrument that never ever goes down...ever....like forever ever.

Tue, 05/17/2011 - 10:47 | 1282938 Careless Whisper
Careless Whisper's picture

apparently you people didn't get today's memo from goldmansachs

Goldman Sachs: China Stocks May Go Crazy in Second Half 2011

http://seekingalpha.com/article/270224-goldman-sachs-china-stocks-may-go...

 

Tue, 05/17/2011 - 15:46 | 1284341 Missing_Link
Missing_Link's picture

Good to know when Goldman will be dumping their shares.

Tue, 05/17/2011 - 11:42 | 1283159 NotApplicable
NotApplicable's picture

Given that China is wholly owned by the gang d.b.a. government, I'd expect the vast majority of these companies to be frauds, even if they currently appear legit, as it is just another version of warfare against the dying, western empire.

Think about it. When I do turn on CNBS, the only new listings ringing the bell are Chinese companies. Nasdaq & NYSE, needing the business, welcome them with open arms as it gives both sides an appearance of credibility.

Meanwhile, under the covers and off of the books, the wealth transfer effect operates until the facade cracks.

If I were a gambling man, I'd short them all. China may be a psuedo-Communist state leaning towards Fascism with a pretense of Capitalism, but I'm sure they can no better control the invisible hand than say, Stalin did. Instead they follow the destructive path of TINA, pragmatically saving today by sacrificing tomorrow.

Even if there are legit Chinese companies listed, they will eventually be targeted, as the flow of wealth will be too great for the criminals to resist taking.

Tue, 05/17/2011 - 14:26 | 1283893 El Gato
El Gato's picture

Which companies are next? How many China RTOs are left?

Tue, 05/17/2011 - 20:45 | 1285402 arthur darrell
arthur darrell's picture

gfre had "numbers" and gain 40% today, to 4!

chbt is wayy up there heck a rare double digiter.

Tue, 05/17/2011 - 15:45 | 1284333 shoptalk
shoptalk's picture

"Which companies are next?"

Perhaps Beijing-based Longtop Financial (LFT) which closed yesterday at 18.93, halted before today's open and has yet to re-open. 

Tue, 05/17/2011 - 18:04 | 1284921 El Gato
El Gato's picture

Any other ones?  Can't trade a halted stock. And Tyler, why can't we access the Nov'10 ZH posting -- was that the posting of Frazer Frost-audited stocks you put up when the fraud that was RINO was uncovered by Muddy Waters?

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