Hedge Funds Used This Data Guru to Make Millions on Nintendo

(Bloomberg) -- Hedge funds will look almost anywhere for an edge. When it comes to trading shares of Nintendo Co., they’re turning to a tiny research shop in a corner of Tokyo better known for used booksellers and guitar stores.

Media Create Co. is the brainchild of Atsushi Hosokawa, a 63-year-old who got his start cold-calling video-game stores for information. His firm now tracks sales in Japan and other Asian countries, estimating shipments ahead of official company releases with enough precision that he’s drawn more than two dozen hedge funds as clients. Last year, the company showed shipments of Nintendo’s portable Switch console weren’t growing as quickly as expected, helping make millions for clients who shorted the stock before the game maker cut its shipment target in January.

Hosokawa’s 11-person firm is gaining prominence amid increasing disagreement over prospects for the Switch. Media Create’s latest data show Nintendo should easily hit its revised target when it reports results next month, suggesting shares could get a much-needed boost after a dismal performance last year.

“Our data doesn’t fail,” Hosokawa said in his first interview in 10 years. “The Switch is still headed for growth in its third year.”

Media Create is part of a burgeoning industry of specialist data providers that help investors make more informed bets on everything from stocks to commodities and currencies. The 25-year-old firm distinguishes itself through close relationships with about 2,000 gaming shops and dozens of publishers, which provide Hosokawa’s analysts with weekly point-of-sale and shipment data on hardware and software in Japan, South Korea and Taiwan.

The data isn’t comprehensive, but his analysts extrapolate with what Hosokawa calls “keikensoku.” The term is usually translated in English as “rule of thumb,” but it literally means “measuring by experience.” Clients pay $20,000 or more a year for reports that forecast local and international trends.

Hosokawa, who also provides some key statistics for free every week on his website, said it is easier to predict global trends for Nintendo than rivals like Sony Corp. That’s partly because Nintendo publishes a regional breakdown of Switch sales, according to Serkan Toto, founder of Tokyo-based consultancy Kantan Games Inc.

Consumer research firms like Media Create focus more on sales than earnings, the purview of most financial analysts. Their findings can be particularly useful in the first few years after new console launches, when hardware adoption provides a strong signal for future profitability. Hosokawa’s major competitor in Japan is Kadokawa Dwango Corp., which is also popular with investors. In the U.S., it is NPD Group.

Hosokawa declined to name investors who use his service, but said client interest in Nintendo jumped in May as Media Create’s data showed Switch sales were flat -- at odds with the market consensus for a more than 30 percent jump in the fiscal year ending this month. Around the same time, Nintendo’s stock began sinking as hedge funds including Melvin Capital Management amassed large short positions.

Switch sales growth picked up after the release of major titles Let’s Go Pikachu and Eevee in November and Super Smash Bros. Ultimate in December, but not nearly enough to reach Nintendo’s annual target. The company ultimately cut the goal in January, sending shares plunging again.

Melvin Capital’s short bet would have made at least $67 million, based on Bloomberg calculations that assume the hedge fund still holds the position it disclosed in its last regulatory filing to the Tokyo Stock Exchange in August. The firm’s Chief Operating Officer David Kurd declined to comment on trading in Nintendo.

Nintendo shares were little changed in Tokyo on Monday and have gained 1.1 percent this year. Last year, the stock fell 29 percent, its worst annual performance since 2011.

Despite the Switch’s lackluster 2018, Hosokawa is upbeat about the hybrid gaming device. He expects hardware shipments to peak in the fiscal year that begins in April, implying Nintendo will sell more than the 17 million units it expects to ship in the current period. Wall Street analysts are divided, with some including UBS Group AG and Mitsubishi UFJ Morgan Stanley Securities Co. expecting it to sell fewer units next period.

The Switch is selling strongly across all demographics -- from kids and teenagers to adults -- a feat achieved only by Nintendo’s DS handheld device, its best-selling hardware product in history, Hosokawa said. That bodes well for long-term sales.

“We expect its life-cycle to be seven years,” he said, during an interview at Media Create’s office in Tokyo’s Jinbocho district. The quaint area, full of pre-war Japanese cafes, is popular with students and has been the setting for Japanese novels, including Haruki Murakami’s Norwegian Wood.

Hosokawa founded the company in 1994, the year the original PlayStation went on sale in Japan. Predicting that executives in the burgeoning game industry would need sales information to make decisions, he started building relationships with retail chains to ask for point-of-sale data. Over the past decade, investors also began subscribing. Today, he says Nintendo is the most sought-after company from hedge fund clients, which come from as far away as Singapore and New York.

Media Create’s free weekly data dumps have also made it a popular source for gamers, retail investors and arm-chair analysts online. Hosokawa said that is his way of giving back to the game industry, though he’s unsure if the practice will continue after a company policy review next month.

“With our data, we’re trying to be the infrastructure for the whole industry,” he said, explaining plans to expand his data collection to China and Southeast Asia. “I’d like to think that’s why overseas investors trust us.”

©2019 Bloomberg L.P.