It is no secret that investor interest in Japan-focused hedge funds has been quite low for many years. Recently, as investors have become more comfortable with the market and have begun to put their money back to work, Japan-focused funds have struggled significantly relative to funds focused on the region. According to the annual data analysis from Eurekahedge, Asia-focused funds—with the exception of Japan-focused funds—returned possibly their best year to date in 2009, gaining nearly 40 percent.1 And as we have moved into 2010, Japanese funds are becoming even more intriguing.
Through the end of February, “Japanese hedge funds have seen slightly positive asset flows so far this year, compared with outflows from the rest of Asia.”2 Investors are beginning to take notice, and even after redundant disappointments in past years, many believe that 2010 is the year for Japanese funds. In a recently released report, a prominent hedge fund chief executive stated that, “many institutions are massively underweight Japan and it’s time to get up to neutral weighting on the country.”3 Investors seem to be taking a liking to funds focused on small- and mid-cap Japanese companies that are in a position to benefit from growth in Asia and emerging markets.
These trends are reinforced by the research performed by the BHA analyst team on a daily basis. While not overwhelming, interest in Japan-focused hedge funds is rather significant, following a period where interest in the country was minimal. Since the start of the fourth quarter of 2009, the BHA team has spoken to more than 50 investors, ranging from small family offices to large university endowments, all of which have a genuine interest in Japanese funds.
A university endowment based in the U.S. recently told BHA analysts that Japanese long/short equity funds are of particular interest right now. The endowment recognizes that Japanese funds have been unstable for some time and, therefore, it will only allocate to fund managers who have dedicated their careers to learning the Japanese market and have experienced the ups and downs. With that said, the investor sees great upside potential in such managers for the near future.
While confidence in Japan-focused hedge funds may be shaky, it is hard to ignore positive returns. Investors are becoming more and more interested month over month as fund managers gain confidence in their abilities to net positive returns in a once bleak marketplace.
1 Absolute Return + Alpha, “Hedge Funds to Continue 2009 Growth in New Year,” January 20, 2010,
2,3 Thomson Reuters, “Japan hedge funds see increased interest,” March 2, 2010.
