Why Are Hedge Funds Pouring Into Alibaba?  

Part hype, part good investment.  But mostly investor expectation.
Hedge funds are throwing money at Alibaba (NASDAQ: BABA) in the wake of its record IPO. Is there something they know that the average investor doesn’t?
It isn’t like these are small funds investing small amounts, either. Look at this partial roster and their share purchases:
Viking Global: 11MMhedge-funds-alibaba
Third Point: 7.2MM
Soros: 4.4MM
John Paulson: 1.9MM
Tiger Management: 1.2MM
Moore Capital: 1.5MM
Blue Mountain: 303K
Appaloosa Management: 725K
Why the big rush?
I think there are several things going on here. First and foremost, Alibaba is a real company with real revenue and earnings. In its fiscal year ended last March, Alibaba reported $8.5 billion in revenue, with an incredible $3.8 billion in net income, good for a 40% net margin. Nobody has margins like that.
The growth prospects are significant. With only 46% of Chinese citizens having access to the Internet, there is plenty of market share left untapped. Nevertheless, that 46% still represents 632 million people, more than three times the number of Americans on the Internet. As it is, Alibaba controls 80% of all online sales in China — effectively making it a monopoly.
There are other reasons that have little to do with the company, however, and more to do with hedge-fund psychology.
All of these funds are looking at Yahoo! (NASDAQ: YHOO) and they want to make the same $5 billion killing Yahoo! did. Hedge-fund operators are extremely competitive and have huge egos. They want to show their investors that they are smart and ahead of the curve.
That is, after all, the reason hedge funds get paid so much money by their clients.
That leads to another reason, and it has to do with the hype surrounding the offering. Alibaba’s was the most anticipated IPO in some time, fueled by the perception that the company is the “Chinese equivalent to Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY).
As a hedge fun operator, you practically are required to buy into the IPO, whether it makes a lot of sense or not. What happens if you think Alibaba is a dangerous play because it rests in a country known for its corruption, where a number of companies have turned out to be frauds, so you don’t invest…and the stock soars?
What happens if you know there are risks due to the slowing Chinese economy, that the company faces competition from Baidu (NASDAQ: BIDU), that mobile phone companies are dabbling in e-commerce, and that counterfeit goods are a big problem? Or that there are acquisitions to digest, including one involving an accounting scandal?
Do you ignore all of these red flags just to get in on the hot IPO that your clients expect you to get in on?
Therein lies another issue for the hedgies. The difference between them and Joe Investor is that even if Alibaba blows up one day, it still will represent a piece of a diversified portfolio that won’t harm the fund’s overall result.
Better to look like a genius now and get in.

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