According to Eurekahedge, not a single Japanese hedge fund has been launched this year. It’s just as well – they would have had a hard time raising money given that some existing funds have made double-digit losses in 2006.
Investors are understandably beginning to get nervous, especially so given that this is the first time in Asia that a hedge fund sector has really struggled. Eureka’s Japan index has lost 5% since the beginning of the year, underperforming the Nikkei. And to make matters worse, it’s not just a handful of small, unknown funds that have lost money. Forty-five percent of the 104 Japan-dedicated hedge funds that Eurekahedge tracks have posted negative returns year to date.
The losses are a result of managers’ exposure to small-cap and micro-cap companies, which have taken a beating. The Tokyo Stock Exchange’s Mothers index has lost 49% year to date, and the Jasdaq, having reached a year-to-date high of 142.81 in January after an excellent run in 2005, was in the mid-90s as Euromoney went to press. The lack of shorts in play raises questions.
As dramatic as all this sounds, the mounting panic of investors and the media might be uncalled for. Yes, there are natural liquidity concerns. Many of these funds are very big and hold large positions in micro-cap stock so that they probably cannot liquidate at current NAVs. In theory, the last to redeem could get screwed. But returns have been so good up to this year that long-term investors should be able to withstand the dip, and some analysts claim a bounce up is to be expected. Whitney’s New Japan fund, which has lost 30% this year, was up 70% in 2003, 21% in 2004, and 66% in 2005. If you had invested in this fund as recently as September 2005, you’d now be flat – hardly a disaster.
For too long in Asia the sentiment among investors and, in turn, managers, has been that markets are upward-moving only. Investors see stock markets producing high double digits and discard hedge funds that offer more reasonable high-single/low-double-digit returns. In turn, managers know they have to perform to raise capital so, while proclaiming themselves to be long/short, are operating more of a long-only strategy in order to compete for money going into stock markets. Yet the point of hedge funds is to produce returns even in a down market. Investors need to be aware of their true long exposure, and ensure that they have a portfolio of uncorrelated managers if they want to benefit from stable long-term positive performance in Asia.
It’s to be hoped that Japan’s current woes will save Asian hedge fund investors from potentially more serious losses in the future, and will allow managers that can short the ability to do just that.
