Last week, global hedge funds quietly made their move, and not a subtle one. According to a note from Goldman Sachs, hedge funds dumped Japanese stocks at the fastest pace in over two months.

All eyes were on Japan’s upper house election, which took place Sunday, and the funds clearly didn’t want to stick around for the drama.

Turns out, they may have called it just right.

Prime Minister Shigeru Ishiba’s ruling coalition took a major hit in that election. It was the kind of political shake-up that hedge funds like to steer clear of.

So, they did what they do best, that is moved their money.

Between July 11 and July 17, hedge funds increased their short bets and trimmed down their long positions, according to Goldman’s prime brokerage note.

Politics Rattle Japan’s Markets

Japan’s stock market didn’t take the news well. The Nikkei 225 and Topix indexes both dropped this month, 1.7% and 0.6%, respectively, even while global markets were rallying. On Friday before the election, both indices closed lower, showing that investors weren’t feeling too hopeful.

By Monday, Japanese markets were closed for a holiday. But the yen got stronger, and Nikkei futures edged up a bit. So, it seems like the market had already seen it coming and priced it in.

But this election wasn’t just a short-term market story.

The bigger shock was that this was the first time since 1955 that the LDP-led government had lost the majority in both the upper and lower houses. That’s a huge deal.

Why They Pulled Out Early

Goldman says hedge funds are still technically overweight on Japan, compared to their MSCI World Index weight, by about 0.6%.

But their recent moves show they’re not loving the current uncertainty. With Ishiba losing grip on power, investors are worried about policy paralysis and rising fiscal deficits.

It’s a reminder of how hedge funds operate: they don’t wait for headlines, they try to move before them. This sell-off wasn’t emotional; it was strategic.

If you’re watching Japan or considering exposure through international funds, this is one of those moments where political noise can shake the market more than fundamentals.

And for hedge funds, avoiding turbulence often matters more than catching upside.

A tip for investors is to keep an eye on global elections. Big money moves fast when political risks rise, and understanding how it affects markets like Japan gives you a better edge, even if you’re not investing there yet.