Volatility Gets the Best of Many Japan Hedge Funds

In today's Wall Street Journal Asia print edition, Laura Santini describes the year-to-date struggles of specialized Japan hedge funds in HEARD IN ASIA: Hot Hedge Funds Stall in Japan.

U.S. based Whitney & Co. runs one of the biggest hedge funds in Japan, Whitney New Japan Fund. It had assets of $1.3 billion at the end of last year in which it reportedly had a return of 40+% but has lost 23% this year through July. Whitney's Japan Select Fund with about $200 million in assets at the end of last year and a 65% gain has fared even worse losing 29% this year.

Eurakahedge, a hedge fund performance tracking company in Singapore says that Whitney is not alone and that 45% of the 104 hedge funds investing exclusively in Japan have posted negative returns year-to-date. Funds report voluntarily to Eurakhedge -- 40% of funds have not offered updates and the remaining 15% are positive YTD. James Fiorillo, founder of Ottoman Capital, a Japan-focused hedge-fund advisory firm comments:

"What's happened this year globally is that we've entered a flight-to-quality environment."

Therefore, Japanese stocks have suffered heavily on two occasions: (1) the livedoor Co. "shock" in January and (2) following the BoJ's decision to end its quantitative easing monetary policy and the Fed's May 10th rate hike. On top of that the article points out hedge funds in Japan tend to operate more like mutual funds, thus leaving them exposed to volatility.

Comment: Managers of Japan hedge funds got trapped in micro cap stocks (not small caps) that have few shares outstanding. They got greedy (or maybe missed the boat and got in too late) and subsequently got burned. Even Fidelity was hurt by its heavy exposure to livedoor.

Shares listed on the more speculative exchanges in Japan designated for startups and emerging firms have been slaughtered with the Tokyo Stock Exchange's Mothers losing 49% YTD, down as much as 57% on July 26. As of Monday, JASDAQ was down 35% on the year after gaining 43% last year. Now would be the time to buy as I mention in the first post linked below.

I am looking into why Japan hedge funds weren't/aren't short selling. For further insight on why they are having a miserable year see: Online Trading 'Fizzles' in Japan and Nikkei 225 and S&P500 Correlation Bad for Investors.