Hong Kong's stock index is up 20% year-to-date, driven by solid economic growth and rising exports. Short interest has increased by 20%, suggesting investors are shorting the rising market while covering shorts in declining markets.

Hong Kong is up 20% year-to-date, while the rest of Asia has remained mostly flat.

Key drivers include solid economic growth fueled by rising exports, continued expansion of the Mainland Chinese economy, and Hong Kongs efforts to strengthen ties with other markets. Additionally, mainland investors have been buying into Hong Kong equities, driven by optimism surrounding China's tech sector and AI startups.

Short interest across Asia has declined, with the notable exception of Hong Kong, where short interest as a percentage of float has increased by 20%.

This suggests a linear relationship: investors are shorting the only market that is rising while covering shorts (buying) in the markets that are declining.

This behavior reflects a reversal or value strategy rather than a momentum-driven one.

Some of the shorting activity may be attributable to hedging in the derivatives market and long short strategies vs individual stocks or other countries.

Short interest as a percent of float has risen in 80% of individual HK-listed stocks.

The largest notional short positions are in Byd, Ping An, Tencent, Xiaomi, and Meituan.

The increase in short interest appears broad-based and not correlated with each stock's returns, suggesting that investors may be shorting the index rather than individual names.

The Hang Sang tracked the mainland index last year, but they diverged this year, although they are still correlated.

The EWH (Hong Kong ETF) does not have an increase in shoring, nor does FXI (the H shares ETF) as it is a local phenomenon.

Hong Kong's stock index surge and increased short interest highlight a reversal strategy by investors. The broad-based rise in short interest suggests hedging and long-short strategies, with notable positions in Byd, Ping An, Tencent, Xiaomi, and Meituan.

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