Japanese hedge fund managers have been shorting domestic healthcare and IT companies, while their China-focused counterparts have been betting against construction and banking stocks.

Video game developer GungHo Online Entertainment, e-commerce website DeNA and medical device maker 3D Matrix have all seen increased interest from short sellers over the past 12 months, according to research from data provider Markit.

Short-sellers are targeting non-Nikkei 225 shares, indicating that small- and mid-cap names are seen as the most liable to fall sufficiently to reap performance gains.

This is despite a rise in borrowing demand for shares with high fees, of over 100 basis points. This points to crowding in a small pool of stocks – or 'specials' – as securities loan balances have been relatively flat at $40 billion, the same level seen over the past three years.  

After posting the best performance among hedge funds globally, with a 27% gain in 2013, Japanese managers were only up 0.08% in January, according to Eurekahedge data, as an emerging markets rout sparked volatility that resulted in -8.45% fall in the Nikkei 225 that month.

However, equity researchers at Société Générale predict that the Nikkei is set for another market rally in the spring. Monetary easing measures are expected to be extended after next month’s scheduled sales tax rise to 8% from 5%.

For the long book, hedge funds with auto-related stocks in the long book are likely to see strong upside movements, says Markit analyst Simon Colvert.

“Arguably the single largest success story coming from the weak yen policy has been seen in the automobile sector, with the surge in car shipments globally returning many formerly loss-making manufacturers back to profitability,” he notes.

It is an industry also earmarked for growth by hedge fund Nezu Asia Capital Management, which identified Fuji Heavy – the maker of Subaru autos – and Toyo Tire as potentially promising stocks for the long book at the Lyxor Hedge Fund Forum in November.

Meanwhile, Chinese companies were the most shorted stocks among emerging markets in the 830 constituents of the MSCI World Index, with an average of 4.5% of free float out on loan in the six weeks to mid-February, according to Markit.

Anuhi Conch Cement was the most shorted company, with 22% of its free float out on loan. It reflects a negative outlook on the country’s slowing economic growth prospects, as does a boost in demand to borrow for mainland financial sector stocks.

China Minsheng Banking Corporation, which specialises in loans to small- and medium-sized businesses, has 13% of its shares outstanding on loan.

And some feel China will see a continued rise in short-selling demand.

Tiburon Partners has taken a negative bet on China in its Asia long/short fund, while a recent opinion piece penned by veteran investor and notorius short-seller George Soros says the mainland debt-fuelled expansion “has run out of steam”.