The Nikkei is a price-weighted index, like the Dow Jones Industrial Average. Designed before the era of calculators and computers, it is constructed by simply summing the price of one share of each constituent stock and adjusting the total with a constant divisor.

Very few investors actually follow price weighting in practice. Most either use market capitalization weighting or assign weights based on their investment convictions.

One exception is in Japan, investment advisors (IAs) tend to allocate funds to Nikkei stocks in a price-weighted manner. The accompanying chart illustrates that higher-priced stocks receive more yen investments.

The hedge funds do not invest in a price-weighted fashion.

Capitalization-weighted methods are overlooked in favor of a more equal-weighted approach. This is evident as larger stocks tend to receive proportionally less allocation.

On the short side, we observe the same pattern: larger-cap stocks are shorted less, while smaller-cap stocks are shorted more aggressively.

Unlike long positions, higher-priced stocks are not disproportionately shorted. This mirrors hedge fund behavior on the long side, where stock price has little influence on investment decisions.

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