TOKYO -- Conspicuous short-selling of small- and medium-cap shares by a foreign hedge fund has spooked retail investors, sparking profit-taking and holding back buying even as prices dip.
A giant appears
Nippon Sheet Glass slid for the second session straight on Monday, ending down 9% from last Thursday. Downgraded earnings forecasts for the year ending March 2016, announced Thursday, were largely responsible for the dive. But a Monday announcement by the Tokyo Stock Exchange regarding outstanding short sales also put investors on alert: a U.K.-run, Cayman Islands-registered hedge fund, Oxam Quant Fund, had stepped up short-selling of the company's shares.
The TSE announces investors' short positions when they include more than 0.5% of a company's outstanding shares. Oxam's short positions in Nippon Sheet Glass on Thursday equaled 1.54% of issued shares; that percentage jumped to 1.74% on Friday.
Oxam Quant Fund -- operated by Oxford Asset Management -- is becoming an influential seller on the startup markets as well. The fund has drawn notice for increased sales of shares in W-Scope, listed on the TSE Mothers board. Its short interest in Mothers-listed software company Access has now climbed to 2% of issued shares. Oxam has been made to announce short positions on 83 issues, accounting for nearly 30% of all short-selling announcements made by the TSE. It has also drawn the ire of smaller-time investors, who complain that the mysterious fund has caused popular stocks to suddenly lose steam.
But such a nasty reputation is perhaps undeserved. A source familiar with Oxford Asset Management noted that the company consists primarily of mathematicians and engineers, including seven medalists from the International Mathematical Olympiad. What shares are bought and sold is decided by in-depth models based on interest rates, economic indicators, share prices, corporate earnings and finances, and all manner of other data. Letting a computer make rules-based decisions keeps human emotion from interfering with trading, OAM believes.
The quant fund contains $5 billion -- around 600 billion yen. Between 50 billion yen and 100 billion yen of that is invested in Japanese stocks at a given time. Those shares are typically held for anywhere from several days to over a year, so it is not a high-frequency trader. The fund maintains balanced short and long positions across a given industry, profitably adjusting those holdings in response to market trends.
That Oxam must report so many short-sold issues is due largely to the fund's involvement in small- to medium-cap stocks, where crossing the 0.5% threshold is a relatively simple feat. In recent years, hedge funds have increasingly shorted shares of lesser-known companies, gathered from retail investors through online brokerages and lent through foreign securities firms. That type of selling is a departure from the model hedge fund of several years ago, which would take short positions on blue-chip issues using shares borrowed from insurers, trust banks and other institutional investors.
In line with its quantitative bent, OAM believes that market action ultimately returns shares to their proper prices, based on fundamentals. Shares that individual buying has sent rocketing based on fevered speculation thus become prime targets for short-selling -- professional knowledge cooling overheated trading. Yet such a mechanism in a smaller-cap market also cuts chances for retail investors to win big on under-the-radar issues and spurs profit-taking as soon as gains occur. As large investors move into narrower fields, individuals find themselves increasingly crowded out.