The rally in Japanese stocks since new Prime Minister Shinzo Abe pledged to jump-start growth is starting to stir investor interest in hedge funds that invest in Asia’s second-largest economy.
Japanese hedge funds returned 11.3 percent from December through February, the best three-month result on record, according to Eurekahedge Pte, as the Bank of Japan’s effort to expand monetary easing weakened the yen and boosted stocks. Overseas investors have stepped up purchases of Japanese equities, including a record net 1.02 trillion yen ($10.6 billion) in the week to March 8, data compiled by the Tokyo Stock Exchange shows.
“Investors who had written off Japan are finally starting to take a look at it once again,” said Masahiro Koshiba, chief executive officer at Tokyo-based United Managers Japan Inc., which runs the Kotoshiro Fund. “It’s been a while since we have seen such an interest.”
United Managers has raised $13 million for the long-short equity fund since it began marketing in the middle of last year, Koshiba said. Symphony Financial Partners received allocations from new and existing investors at the end of December for its $200 million Japan-focused hedge fund, while Stats Investment Management Co. won the equivalent of $10 million in new money.
The benchmark Topix index has surged 45 percent since Nov. 14, when the elections that returned Abe to power the following month were announced. The yen has weakened about 15 percent against the dollar since mid-November, helping boost the value of exporters’ earnings abroad as Abe called for unlimited money printing by the BOJ to overcome persistent declining prices.
The Topix gained 0.8 percent at the close in Tokyo as the yen weakened.
“Not being invested in Japan isn’t looking too good right now,” said David Baran, co-chief executive officer of Tokyo- based Symphony Financial, whose hedge fund returned 44 percent last year. “Investors’ angst over their minuscule weightings in Japan is increasing. There is a lot of idle cash around looking for what hasn’t performed and what’s still cheap.” Baran declined to give specific amounts its fund attracted.
Hedge funds that invest in Japan have a big hole to climb out of. Assets have declined more than 60 percent since they peaked in 2006 and stood at $14.3 billion at the end of February after losing net $50 million in the first two months of this year, according to Singapore-based Eurekahedge.
Investors grew weary after the collapse of Livedoor Co. in 2006 for fabricating profits sparked concerns about the finances of smaller-cap Japanese companies that many hedge funds had invested in. That was followed by the global financial crisis in 2008 and the covered-up losses at AIJ Investment Advisors Co. last year.
Japan’s consumer prices haven’t risen since the late 1990s and sovereign debt has ballooned to more than double gross domestic product.
“Hedge-fund asset flows usually take a bit longer to materialize as opposed to money flows in the markets,” said Farhan Mumtaz, an analyst at Eurekahedge in Singapore. “This is because even though investors may decide that they want exposure to Japanese funds, they would first need to decide on which funds. The due diligence pipeline has become quite long, especially since the financial crisis.”
The Eurekahedge Japan Index, which tracks 80 funds, returned 6.5 percent in 2012, the worst performer among five regional indexes tracked by the data provider. The Japan managers had net outflows of $1.9 billion in 2012, it said.
“There are still many investors waiting on the sidelines to see whether Abe will deliver on his promises,” said Bertrand De Mil, who runs a Japan-focused fund at Gordian Capital Singapore Pte. “They are wrong. He will deliver and the flow of money coming back to Japan is not going to stop.”
De Mil’s long-short fund, which gained 8 percent this year through March 13, won additional allocations at the end of February, bringing assets to $15.3 million, he said.
“We’re definitely seeing more demand for Japan-focused hedge funds now and the trend will probably continue for a while,” said Toshikazu Yamazaki, the senior fund manager at SRF Group Pte in Singapore, which started an Asia-focused fund- of- hedge-funds in December. “It’s not simply because of the rally in Japanese stocks, but more so that with an increase in market participants, there are more opportunities for hedge funds to make money.”
Yamazaki said his fund won $15 million in additional investments in February, bringing the assets of his fund-of- hedge-funds to $52 million.
Masamitsu Ohki, who runs Ginga Explorer Fund at Tokyo-based Stats Investment, said he met with 15 investors during a three- day trip to Hong Kong in February, three of whom began due diligence on the fund. Ginga returned 9.3 percent in January after a 23 percent gain in 2012, he said.
“We’ve been explaining to people for the past two to three years that they are ignoring an opportunity for incredible bargains just because the companies are in Japan,” Symphony’s Baran said. “Investors globally seem to be recognizing that the decline of Japan to the point of irrelevance is not a reasonable investment position to take.”
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