Monterey's Japan Hedge Fund Returned 19% in 2010, Beating Peers on Stocks

Monterey Capital Management Pte’s Japan-focused equity hedge fund gained 19 percent in 2010, more than double rivals’ returns, on investments in stocks including Skymark Airlines Inc. and consumer finance companies.

The Monterey Japan Equity Fund returned 101 percent since inception in June 2006 through November, making it the best- performing Japan-focused hedge fund during the period, based on data from funds with sufficient track record, according to Eurekahedge Pte. The fund, which started with 1.5 billion yen ($18 million), aims to increase its assets to about 20 billion yen over the next several years, said Kei Murata, chief executive officer of the Singapore-based firm.

The fund employs a long-short equity strategy that involves betting on rising and falling stock prices. It beat the 8.4 percent return by Eurekahedge’s Japan Hedge Fund Index in 2010 and the 1 percent drop in the nation’s benchmark Topix index.

This year, the fund aims to buy Asian stocks to diversify and may invest in Japanese agricultural-industry companies amid gains in soft commodity prices, Murata said.

“We’ve been hedging our net exposures based on economic fundamentals around the world and that has led to the performance,” Murata, 41, said in a telephone interview yesterday. “I’m pretty bullish for the first quarter this year.”

Skymark, Asahi Diamond

The fund, which has had an annualized return of 19.4 percent since inception, close to its 20 percent target, uses options and futures to hedge its investments, said Murata. It has about 100 positions and invests in companies with a market capitalization of 20 billion yen to 30 billion yen, he said.

Skymark, Japan’s largest low-cost carrier, was among investments that contributed to the fund’s performance last year, said Murata. The fund invested in the stock on expectations that the firm will benefit after Japan Airlines Corp.’s bankruptcy, he said. The stock tripled in 2010.

The fund also bought Tokyo-based Asahi Diamond Industrial Co., which makes diamond-tipped tools, amid rising demand for light-emitting diodes, Murata said. The stock more than doubled last year.

Among short positions, the fund sold shares of consumer finance companies, Murata said, declining to identify the firms. Shorting involves selling borrowed stocks with the anticipation the shares can be bought later cheaper.

Agriculture Theme

This year, the fund is looking to invest in agriculture- related companies such as chemical maker Nippon Soda Co., Murata said. The Reuters/Jefferies CRB Index climbed 17 percent in 2010, extending a 23 percent advance in the previous year.

To hedge long positions in agriculture-related companies, Monterey Japan plans to sell shares of some of the companies in the food industry such as restaurant operators, he said.

Monterey is also looking to invest in some technology- related firms amid signs earnings are recovering at their U.S. counterparts, Murata said. Apple Inc. reported sales and profit that exceeded analysts’ predictions and Intel Corp. forecast revenue to rise 10 percent in 2011.

Japanese investors, such as institutions, pension funds and high-net-worth individuals, account for 40 percent of the fund, while the rest are overseas investors, including some in Hong Kong and Switzerland, Murata said.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net.

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