Hedge funds flock to Japan as market heats up

Japan has emerged as a standout in Asia's subdued $400 billion hedge fund sector, drawing fund launches while other regions suffer closures in an indicator that wild volatility in August has not derailed a revival in Japanese capital markets.

Hedge fund liquidations in Asia have outpaced new launches since 2023 mostly due to China's faltering stock market.

However, the number of Japan-focused funds saw a net increase of more than 10 during this period, Preqin data shows.

At least a further five Japan-focused funds have launched or are preparing to debut in the third and fourth quarters of the year, spanning strategies equity long-short to quantitative, according to funds or people familiar with their plans.

The launches come from both home and abroad and are being well received by investors.

They point to confidence in Japan - long overlooked by hedge funds and a broad swathe of other investors, and lately rattled by the biggest one-day stocks rout since 1987 - and suggest its financial markets are coming back to life after decades on the periphery for many big investors.

"Japan is finally changing in a positive way, with inflation and wage growth," said Soichi Utsumi, founder of Shinka Capital Management which is launching a Japan equity long-short fund.

"I've never seen such big trends in my whole professional life," said Utsumi, formerly a partner at hedge fund Asia Research & Capital Management Limited.

Japanese equity markets hit all-time highs in July on a wave of foreign interest and a corporate governance reform drive. Interest rates are in positive territory and rising for the first time in many investors' memories as the economy grows.

Utsumi said his fund will focus on governance change and opportunities in rising interest rates, and advisors say the themes are resonating with investors.

"We've seen more interest in Japan-focused managers," said Jon Caplis, CEO of hedge fund research firm PivotalPath.

Japanese markets' resurgence was dramatically interrupted in early August when a Bank of Japan rate hike and softening US economic data triggered a sudden rise in the yen and collapse in the stock market.

However, the gyrations haven't deterred the hedge funds from the Japanese market.

Hong Kong's $700 million ActusRayPartners said it is set to launch a new Japan strategy later this month, targeting to raise $100 million by the end of the year.

The quant fund interpreted the market selloff as a positive as a crowded short bet on the yen has unwound.

Another encouragement is coming from rates, which have been hiked twice this year.

As rates are expected to rise further, "that inevitably makes the market a bit volatile, zombie companies cannot just survive in the end, which is good for the long- short strategy," said Tetsuo Ochi, CIO at MCP Group, a $2.5 billion alternative investment firm that mainly helps Japanese institutions invest globally.

In August it launched a rare Japan-focused fund of hedge funds and attracted a 10 billion yen ($70 million) investment from Japanese insurer Dai-ichi Life, according to MCP.

Dai-ichi Life's investment aims to support emerging managers to help revitalise Japan as an asset management hub, the insurer said in a separate statement.

The other two new Japan funds include multi-manager platform Penglai Peak Offshore Fund and OQ Funds Management’s new Japan strategy. The latter was reported earlier by Bloomberg, citing the fund's manager. Penglai Peak's owner Lighthouse Investment Partners did not respond to requests for comment.

To be sure, a growing proportion of global investors plan to reduce hedge fund allocations in their portfolios as returns lag some benchmarks, a Preqin survey found in August.

However Japan long-short equity funds performed relatively well, delivering positive returns in 70 per cent of quarters over the past five years till the second quarter of 2024, according to With Intelligence.