Hedge Funds revert their Attention back to Japanese Stocks

Hedge funds that follow trend-based strategies, known as Commodity Trading Advisers (CTAs), have recently shifted their stance on Japanese stocks from bearish to bullish, according to a note from J.P. Morgan analysts. These funds, which utilize algorithms to capitalize on market trends, began buying Japanese stocks late last week, particularly futures tied to the Nikkei 225 and TOPIX indices.

This move marks a quicker reversal than expected. J.P. Morgan analysts had initially predicted that CTAs would adopt a cautious approach, potentially re-entering the market if the Nikkei share index recovered to above 35,000 following an early-August downturn. However, as the Nikkei 225 surged more than 20% from its lows on August 5, closing above 38,000, CTAs restored their positions sooner than anticipated.

The August 5 plunge in the Nikkei was the steepest since 1987, triggered by massive deleveraging in systematic trading strategies, partly due to a surprise interest rate hike by the Bank of Japan. CTAs' systematic approach relies on algorithms and strict rules rather than speculative instincts, and their recent buying spree reflects the strength of the index's rebound.