One of Australia’s leading hedge funds believes the viral Labubu craze is about to come crashing down, and is looking to capitalise.

Arnott Capital wrote to investors late last week advising it will short – that is, invest in a way that capitalises on a company’s share price falling – the stock of Pop Mart, the manufacturer of the popular dolls.

The China-based, Hong Kong-listed firm’s market capitalisation has rocketed from about $10 billion in 2020 to more than $65 billion today on the back of demand for its Labubus, which is currently far outstripping supply.

That’s been driven by social media attention for the dolls, with celebrities including David Beckham, Kim Kardashian and K-pop girl group Blackpink, as well as their “blind box” format, which means shoppers don’t know what version they’re purchasing.

The collectibles, which retail for between $30 and $60, have fetched prices well into the thousands on the second-hand market, with one selling for $US10,500 ($16,250) just last week.

However, according to Arnott Capital, the craze is showing signs of petering out.

“The risk in shorting companies we classify as ‘hype cycle’ or ‘fad’ stocks is that, without a clear catalyst, it’s impossible to predict how long their momentum will last – like trying to measure an endless piece of string,” it said in a note to investors.

“However, we believe that catalyst is now unfolding in real time across the internet…

“In June, the re-sale prices of Labubus peaked and continued their trajectory downwards.

“We believe this will put a significant portion of the demand seen in the second half of 2024 and the first half of 2025 at risk, potentially resulting in loss-making inventory and an oversupply that floods the market.”

Arnott Capital drew comparisons to the Hello Kitty craze in the early 2010s, when the share price of maker Sanrio surged some 700 per cent before plummeting in the space of a couple of years.

“We believe the Labubu doll is following a similar hype cycle, only accelerated by the unique feature that Labubu dolls are acquired via ‘blind boxes’… this has, in our opinion, created a pseudo lotto,” it wrote.

High demand and low supply has resulted in scalpers buying the dolls to flip onto the resale market for a profit, and the creation of websites that allow collectors to make bots to buy them.