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Japan's retail investors caught out by Nikkei's breakout rally

Tan KW
Publish date: Fri, 09 Jun 2023, 02:51 PM
Tan KW
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TOKYO The unusually long rally in Japan's stock market has trapped many retail investors in a sea of losses after they made heavy bets on exchange traded funds (ETFs) that double their returns if the benchmark falls.

Four such funds, known as "double-inverse" ETFs and managed by some of Japan's biggest asset managers, are designed for short-term investors and pay them double the opposite of the Nikkei's daily declines, by taking short positions in Nikkei futures.

Long accustomed to the Nikkei's lacklustre performance, domestic retail investors piled into such ETFs as the Nikkei hit a 33-year high on May 19, convinced the rally would rapidly capitulate.

But instead of reversing, the Nikkei stunned with three more weeks of gains, prompting some double-inverse investors to cut their losses and sell the shares. The Nikkei has gained 23% so far this year, driven by foreign investors.

That meant asset managers had to cover their positions by buying futures, further propelling the Nikkei's rises and forcing more losses on remaining double-inverse investors in a negative spiral.

"Some investors sold the shares as they couldn't suffer any more losses," said Tomoichiro Kubota, senior market analyst at Matsui Securities. "They made the wrong bet on the Nikkei's move."

Nomura's Next Funds Nikkei 225 Double Inverse Index ETF, the most popular fund seen as a bellwether for double-inverse trade trends, fell to a record low of ¥236 this week. The fund peaked at ¥5,700 when it listed in 2014.

The fund more than doubled the number of units to around one billion this month from 426 million at the start of the year, as investor demand surged.

"If more investors in the double-inverse and others who shorted stocks start closing their positions, that may become a force to lift the Nikkei to the 33,000 level," said Shingo Ide, chief equity strategist at NLI Research Institute.

Some strategists expect the Nikkei to hit those levels driven by optimism that local companies would boost profits and shareholder returns. At the midday break on Friday (June 9), the Nikkei was up 1.6% at 32,149.76.

"The bottom line is whether expectations that Japanese companies boost their capital efficiency will pan out," said Ikuo Mitsui, fund manager at Aizawa Securities.

"If foreign investors maintain this belief, investors in these funds will slowly be hit by more losses."

Shares of other funds - Daiwa iFreeETF Nikkei Double Inverse Index, Simplex Nikkei225 Bear -2x ETF and Rakuten ETF-Nikkei 225 Double Inverse index - also hit record lows this week.


  - Reuters


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