How Index Rebalancing change the arbitrages?
Foreign investment in China's asset allocation has decreased, especially with significant outflows from the Hong Kong stock market. This is quite evident, and for trend investors, there is no need to consider any such type of holdings at this time.
According to EPFR's data, the overweight allocation of foreign investment in Chinese assets peaked in 2018-2019 and has been declining ever since. In 2020, passive funds had the highest overweight allocation.
Passive funds tend to be more related to stock indices such as the $HSI(HSI)$ and the $HSTECH(HSTECH)$ . The valuations of both A-shares and H-shares have declined significantly after 2021, which has also led to a slight decrease in the proportion of passive funds.
Of course, the most significant decrease is in the proportion of active funds.
Therefore, passive funds may currently be an important window for buying assets in the market.
In the adjustment on February 16th, the Hang Seng Index (HSI) maintained its 82 constituents, with $CHINA UNICOM(00762)$ being included in the $HSCEI(HSCEI)$ and $TONGCHENGTRAVEL(00780)$ being included in the Hang Seng Tech Index (Reconstitution). Some constituent weights have changed (rebalancing).
Currently, the ETF tracking the Hang Seng Index has a fund size of approximately $24.46 billion, while the ETFs tracking the Enterprises and Tech Indexes have fund sizes of approximately $5.14 billion and $15.5 billion, respectively.
Based on the average daily trading volume over the past 3 months,
Expected passive fund inflow for 00780 is $190 million, with a duration of 21 days.
For 00762 an expected inflow of $26.73 million is anticipated, with an inflow duration of approximately 1.5 days.
Taking into account the aforementioned changes in constituents and stock weights, as well as the potential impact of passive fund changes and market reactions, it is quite evident.
Furthermore, the index adjustment results will officially take effect on March 4th. Prior to this, there may be active funds engaging in "front-running" arbitrage operations. Passive funds generally measure tracking error as a standard, so they may choose to rebalance on the day before it takes effect, i.e., March 1st.
Previously, when $EAST BUY(01797)$ and $TRIP.COM-S(09961)$ were included in the Hang Seng Tech Index, there was a noticeable increase in trading volume before it officially took effect.
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