A Pair-Trade Strategy Earns 95% Gains with Alibaba & PDD

A Pair-Trade Strategy Earns 95% Gains with Alibaba & PDD

Traders who strategically bet on the varying stock performances of Chinese e-commerce powerhouses Alibaba Group Holding Ltd. (BABA: NYE) and PDD Holdings Inc. (PDD: NSD) have potentially earned a remarkable 95% gain this year.

This pair-trade strategy involves taking a long position in PDD while shorting Alibaba, with the profitability of the trade gaining momentum in recent months. These results are indicative of the industry’s ongoing reshuffle and the growing preference for PDD, which has surpassed Alibaba to become China’s most valuable e-commerce firm.

BABA Ratings by Stock Target Advisor

The pair-trade strategy, commonly used by seasoned traders, focuses on two correlated securities, where one is shorted, and the other is taken long. The larger the performance gap between the two stocks, the more profitable the trade becomes. In this case, PDD has experienced a significant surge of over 80% since the start of the year, while Alibaba has witnessed a decline of 15% in US trading. This divergence presents an opportunity for astute investors to capitalize on the disparity.

PDD Ratings by Stock Target Advisor

The preference for PDD is attributed to its alignment with the growing trend of consumer price sensitivity. Chelsey Tam, an analyst at Morningstar Inc., states that “PDD is the best positioned amid value-for-money consumption trends in China and will benefit from strong long-term growth.” Other preferred choices within the industry include JD.com Inc. and Alibaba, according to Morningstar Inc.

The profitability of the short Alibaba, long PDD stock pair trade reflects a changing landscape in the Chinese e-commerce market, signaling a shift in consumer behavior and priorities. As more consumers prioritize affordability and value-for-money, rather than high-end luxury products, PDD stands to be a major beneficiary of this changing trend.

 

Conclusion: 

Investors who have adopted a pair-trade strategy by shorting Alibaba and going long on PDD have seen remarkable gains of 95% this year. The increasing performance gap between the two Chinese e-commerce giants, with PDD outperforming Alibaba, underscores the evolving preferences of Chinese consumers towards value-for-money platforms. Wall Street banks and analysts are also recognizing the potential of PDD as the top contender in China’s online shopping sector. 

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