Prospect Targets Asset Increase After Freeze's Japan Hedge Fund Gains 210%

Curtis Freeze, who has been investing in Japan for more than 20 years, aims to rebuild his firm’s assets after they fell more than 85 percent from their peak.

Honolulu-based Prospect Asset Management Inc., which manages $280 million, aims to increase total assets to $1 billion in three to four years, said Freeze. The firm’s Japan- focused equity hedge fund returned 210 percent last year, making it the world’s second-best performer.

The asset manager is trying to lure investors to Japan as the country battles deflation, after his $15 million Shareholders’ Consensus Fund’s beat the 8.2 percent gain for Eurekahedge Pte’s Japan Hedge Fund Index in 2010. Prospect’s funds have ranked among top performers over the past two years, helping the firm recover after assets fell to as low as $150 million in March 2009, Freeze said.

“I don’t expect Japan to get the attention overnight and one year of good performance isn’t going to make people want to invest,” Freeze, 48, a New Yorker who arrived in Japan 30 years ago as a Mormon missionary, said in an interview in Tokyo on Jan. 21. “But one by one they are coming back.”

The Consensus Fund was bested by Precision FX Fund, which returned 220.95 percent, according to Eurekahedge, a Singapore- based industry researcher which tracks 6,734 funds worldwide. Prospect’s hedge fund had the best returns in Asia, according to Eurekahedge.

Fund Raising

Prospect is targeting $100 million in the next 18 months for the hedge fund. The firm also runs a long-only fund and individual accounts for a sovereign wealth fund, family office and a fund of funds, according to Freeze.

While Japanese hedge funds completed their best year in five in 2010, their assets have dropped more than 60 percent to $15 billion from a 2006 peak, according to Eurekahedge.

After the collapse of Lehman Brothers Holdings Inc. in 2008 and the onset of the global credit seizure, Freeze began shifting the investment style of the hedge fund, which started in 2005, away from its focus on property. Property-related investments now account for about a third of the fund, he said.

The 2010 return for Consensus Fund comes after two years of more than 80 percent losses, both through redemptions and forced sales of properties that the firm had to write off.

‘Too Big’

Prospect’s assets under management, including real estate, fell from the peak of more than $2 billion in 2007 amid the global credit crisis. Last year, Freeze merged Prospect Residential Investment Corp., the real estate investment trust he listed in 2005, with a unit of Oaktree Capital Management LLC because of financing problems. Prospect’s REIT was down 82 percent at the merger from the initial public offering.

“Last time we got too big and frankly it got too difficult to manage property,” said Freeze. “Performance is very important, but the assets under management aren’t going to grow overnight because people are skeptical, not just about our performance, but they are very skeptical about Japan.”

Freeze began buying Tokyo properties in 2002, when Japan was emerging from its third recession in a decade, and a year after the government created the nation’s REIT market to allow pooling assets into tradable securities, making it easier to invest.

Don’t Fall in Love

Land prices in Japan are about half what they were after the peak of Japan’s asset bubble in the late 1980s.

“One thing we learnt was to not fall in love with property,” said Freeze, who started his career in Japan in 1988 at Nikko Securities as an equity salesman. “We’re now more opportunistic -- it’s not all about believing that real estate will only go up and we would take advantage of mispricings.”

The Consensus Fund employs long-short equity and activist strategies to invest in equities, debt and convertible bonds in Japan with a concentration on domestic-demand related companies. It profited last year by building positions in niche companies such as Zuiko Corp., an Osaka-based maker of machinery that makes diapers, which is benefiting from rising demand for disposable diapers in Asia.

‘Near-Death Experience’

The Permal Long Funds, which Freeze advises for Permal Asset Management Inc., returned 50 percent in 2009, topping the 558 Japan-focused funds that primarily invest in equities, according to data compiled by Bloomberg. The long-only Prospect Japan Fund returned 36 percent, ranking fourth in 2009, and returned 17 percent last year, according to Freeze. The stock benchmark Topix index fell 1 percent in 2010.

“You can describe 2008 as a near-death experience and we’ve spent the last two years rebuilding,” said Freeze. “Having rebuilt our track record, now we’re ready to start marketing again and almost all the growth of the firm will come from the hedge fund.”

The Consensus Fund focuses on companies with a market value of $100 million to $1 billion that don’t have a lot of analyst coverage. It currently holds a dozen positions, among them Oenon Holdings Inc., a producer of rice wine, liquor and seasoning based in Tokyo, whose shares rose 17 percent last year.

“What we’re trying to do is buy these things before the brokers notice and before they get any analyst coverage,” said Freeze. “Typically, we’re selling after half a dozen analysts start coverage.”

Short Sales

The fund will this year seek to build short positions -- where borrowed stock is sold on a bet it can be bought back later for less. It will target the nation’s biggest and most liquid stocks, Freeze said. In about three months time, about 85 percent of the fund will hold long positions and the rest will be short, he said. It also aims to sell short some real estate investment trusts that are planning share sales, he said.

Investments in distressed debt such as that of consumer finance companies Takefuji Corp. and Orix Corp. contributed to the fund’s performance last year, he said.

Freeze is also pursuing more of an activist strategy by seeking to co-invest with other funds.

“The reason we call it a Shareholder Consensus Fund is because we want to reach a consensus with other shareholders and if it’s a group of shareholders telling management something has to change, the likelihood of change is much bigger,” he said.

Gro-bels

Last year, the fund invested in Gro-bels Co., a Tokyo-based property developer, with two other investors Freeze declined to identify. Prospect increased the fund’s position at the end of March, buying a block of shares at 19 yen each, according to Freeze, who used the stake to vote himself president of the company in June. The stock has gone up more than 80 percent.

He is betting on an end to deflation in Japan, benefiting the fund’s investments tied to the domestic economy. The Bank of Japan has kept the overnight call rate target in the range of zero percent to 0.1 percent since October and has been buying assets to spur growth and stamp out deflation.

“The end of deflation will come; it’s already happening,” Freeze said. “Even though, people are so focused on population falling, no domestic demand and no signs of life in Japan, you can’t have the rest of Asia catch fire and Japan not get burnt.”

Freeze has only invested in Japan since starting his career at Nikko, followed by Shearson Lehman Brothers Holdings Inc. He moved to DB Morgan Grenfell Asset Management Ltd. in 1990, where he handled $1.4 billion of investments in Japan’s smaller companies out of favor at the time, according to Freeze.

“My strength is I’ve always focused on Japan and of course, that’s my weakness, too,” Freeze said. “When Japan goes out of favor like it did for a while, there is no interest in what I’m doing, but now people are coming back to Japan after having been away for a few years and there are very few dedicated Japan specialists. I’m not embarrassed to say I’m a Japan specialist.”

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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