Trading Strategy: Japan Discount to HK Shows Signs of Closing (Credit Suisse)

April 2014

KEYWORDS: Japan, Asian Hedge Funds, Asia Pacific, Hong Kong, MSCI, equity hedge funds, Equity markets

Authors:

Victor Lin

Organizations:
  • Credit Suisse

Summary:

Key Points

  • In our monitoring of liquid ETF pairs that have shown a mean-reverting (cointegrated) relationship over the past year, DXJ (WisdomTree Japan Hedged Equity) and EWH (iShares MSCI Hong Kong) stood out as one pair that had significantly diverged in the past few weeks.
  • Recently, the spread between the two has started to tighten, suggesting the statistical relationship between the pair could be heading back to its near-term average.
  • Buying DXJ and shorting EWH (using a ratio of 2.4 EWH to 1 DXJ) would take advantage of the spread between the pair reverting to its historical average.

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