Global hedge funds have ramped up exposure to Japanese equities as the Nikkei surged to record highs, while increasing bearish positions on South Korea, according to a report by Reuters citing a note from Morgan Stanley.

Hedge funds “boosted gross exposure to Japan in relatively large size” last week, with long positions outweighing shorts after a July pullback, the Morgan Stanley prime brokerage note said. Japan remains the most favoured Asian market, supported by eased US-Japan tariff tensions following a July framework deal.

Japan’s benchmark Nikkei topped 43,000 for the first time, with the Topix also hitting record highs. Funds built positions across technology and industrial sectors, lifting shares of Nintendo on strong Switch 2 sales and SoftBank on AI optimism.

Elsewhere in Asia, hedge funds increased net shorts on South Korea, pushing allocations close to decade highs after the country lifted its short-selling ban. Taiwan and Australia saw modest inflows, while flows into Chinese tech stocks listed in Hong Kong remained muted ahead of major earnings.

Morgan Stanley noted that South Korea remains the region’s top-performing market this year, up over 30%, despite rising hedge fund bearishness.