Northwest Warrant Fund Gains 30% in 2012 Helped by Japan Bets

Northwest Warrant Fund Ltd., run by a Hong Kong manager with $605 million in assets, returned 30 percent in 2012, beating Asia-focused peers, with increased bets on a Japanese equity market recovery.

The $17 million fund run by Northwest Investment Management Ltd. gained 24 percent in the final two months when it increased allocations to Japan by 18 percentage points to 66 percent, said Mark Smith, its head of business development. The average Asia-focused hedge fund returned under 10 percent last year, according to an index compiled by Singapore-based data provider Eurekahedge Pte.

Northwest is wagering on the new Japanese leadership led by Prime Minister Shinzo Abe to pursue aggressive monetary policy and fiscal stimulus to rejuvenate the world’s third-largest economy. The fund, which controls about $420 million worth of convertible bonds, has started to further expand its Japan investment on expectations that the weakening yen will help improve earnings outlook for Japanese exporters and benefit banks by boosting the value of stocks and other assets, said Chief Executive Officer George Philips.

“To see the yen creep up to about the 100 level would not be a surprise to us by the end of the year,” Philips said. “The knock-on effect domestically cannot be understated.”

The currency depreciated 10 percent against the dollar in the final quarter of 2012 to 86.75 yen against the dollar and recently traded at 90.37 per dollar.

Sony, ABC-Mart

The warrant fund, which gained 224 percent in 2009, buys convertible bonds, sells the fixed-income components of the securities through asset swaps and keeps the options to convert the securities into stocks. It returned an estimated 20 percent this month through Jan. 18, according to a letter to clients.

It bought some of the 150 billion yen ($1.7 billion) of convertible bonds sold by Sony Corp. in mid-November, Philips said. The notes rose 27 percent by Jan. 23, bolstered by 10 straight weeks of gains in the benchmark Topix index, the longest winning streak since 1986, after Abe called for unlimited monetary easing to end deflation.

The fund also bought some of the 33 billion yen of convertible bonds issued by ABC-Mart Inc., a Tokyo-based shoe retailer, earlier this month, Philips said.

Philips expected Abe to draw inspiration from Korekiyo Takahashi, the Japanese finance minister who was credited for pulling the nation out of the Great Depression before his assassination in 1936. Takahashi boosted spending by 34 percent in the 1932 fiscal year to help end deflation, financing it by doubling bond issuance, according to a report by the Japan Center for Economic Research.

Bank of Japan said on Jan. 22 that it would adopt a 2 percent inflation target and move to open-ended asset purchases from January 2014, answering calls by Abe to double the inflation target to help revive the economy.

Northwest was co-founded by former Cresvale International warrant and convertible bond traders Philips and David Rogers.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE