Hedge funds are playing with fire as they turn short on Nikkei futures for the first time in two years, according to one analyst, noting Japan's public pension fund is ready to buy the dip.
"Shorting the Nikkei can be risky because the government pension fund and the Bank of Japan (BOJ) are effectively providing a floor to prices," said BNP Paribas Chief Japan Equity Strategist Shun Maruyama. "It's a very dangerous strategy for the hedge funds."
Hedge funds had been long Nikkei futures for two years and helped fuel a near 60 percent rally, but that changed in January. "Doubts about the huge Bank of Japan injections led hedge funds to turn net short," Societe Generale equity strategist Arthur van Slooten said in a note last week.
The Nikkei rallied 13 percent in November, boosted by two events in late October: additional monetary easing by the BOJ and an announcement by the Government Pension Investment Fund of Japan (GPIF) – the world's largest public pension fund – that it would double its Japanese stock holdings.
The rally stalled, however, with the Nikkei currently down 1.6 percent from its most recent peak on December 8. Foreign investors sold 897 billion yen ($7.6 billion) worth of stocks in January alone, Ministry of Finance figures show.
Shorting against the GPIF
The public pension fund, which held assets of 126.6 trillion yen ($1.07 trillion) at the end of fiscal 2013, said on October 31 it would boost its stock holding from 12 percent to 25 percent.
In theory, GPIF needs to buy around 1 trillion yen worth of stocks every month for thirteen months to achieve its new allocation target.