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.