JPMorgan: Hedge Funds Reenter Japan Stock Market Faster Than Expected as Trend Turns Around

Analysts at J.P. Morgan said in a report Friday that hedge funds tracking trends have reversed their bearish outlook on Japan's stock market and have started buying the stock since late last week, after selling it off sharply in recent weeks due to "excessive index rebound." Bulk commodity trading advisers (CTAs) or hedge funds that use algorithms to profit from market trends may have started to rebuild their positions in the Nikkei 225 index and the TOPIX futures around August 15, after selling off after the recent sell-off due to "excessive index rebound," according to the analysts.

This shift is faster than the analysts had previously anticipated. They had previously expected that if the Nikkei 225 index rebounded temporarily above 35,000 points after its big rally in early August, CTA would take a wait-and-see approach.

The benchmark Nikkei 225 index has rebounded more than 20 per cent from its low on August 5, when it recorded its biggest single-day percentage drop since 1987, and closed above 38,000 points on Friday.

Analysts said that the large-scale deleveraging of systematic trading strategies by CTA was one of the factors that contributed to the global market crash triggered by the Bank of Japan's surprise interest rate hike. Systematic trading strategies use strict rules, rather than the intuition of speculators, to guide trading and investment decisions, and sometimes include coding and algorithms.

The panic selling of global yen financing trades that had been built up in anticipation of a gradual increase in interest rates by the Bank of Japan's governor Kazuo Ueda, the easing of concerns about the strength of the second-quarter economic data released by Japan, and the easing of concerns about the US recession, have eased after Friday.

Masanari Takada, global quantitative and derivatives strategist at J.P. Morgan, said that CTA is estimated to have sold off about 50 per cent of its long positions in the Nikkei futures by August 9. The SG Trend Index, which tracks a group of CTA returns in Japan, fell 4.4 per cent in the first half of the month.

Takada added that the performance of trend-following funds and macro funds has started to recover from the recent market turmoil.

J.P. Morgan said that CTA were "testing the waters" and added that other macro hedge funds, CTA and funds chasing this trend would return to the market if the Nikkei 225 recovery continued.