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Japanese hedge funds: Japan’s long-only trap

The point of hedge funds is to produce returns even in a down market. Self-styled long/short funds must not allow themselves to become long-only.

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.

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