Hedge funds are positioning to capitalise on a major restructuring of Japan’s Topix equity index, with the largest rebalancing in the benchmark’s history expected to generate approximately $60bn in passive trading flows, according to a report by Bloomberg.

The overhaul, which affects more than 700 stocks, is expected to trigger around $31bn each in buying and selling by passive funds at Thursday’s close, ahead of changes taking effect on Friday. The restructuring, which includes index additions, deletions and free-float weighting adjustments, will be implemented across eight quarterly phases through mid-2028.

Index arbitrage and event-driven hedge funds are seeking to profit from anticipated price movements as exchange-traded funds and other passive investors rebalance their portfolios. The scale of the changes, alongside clearly defined inclusion criteria, has allowed traders to establish long and short positions ahead of the implementation.

Daiwa Securities estimates that index-tracking funds will need to reallocate approximately 3.1% of their portfolios, compared with 1.8% during the previous restructuring completed in January 2025. The resulting trading activity is expected to more than double the volume associated with the earlier overhaul.

Célia Fseil, head of equity market neutral at Candriam, warned that concentrated buying and selling around the closing auction could create significant opportunities for index arbitrage strategies while increasing execution risks. Market volatility has already complicated some positions, with semiconductor manufacturer Kioxia falling nearly 30% since the changes were announced on 7 October, despite being set for an increased index weighting.

The restructuring comes amid growing hedge fund interest in Japanese equities, supported by corporate governance reforms and strong market performance. The Topix has gained approximately 17% this year, outperforming major US and European benchmarks, while the latest index changes offer additional opportunities for short-term arbitrage strategies.