Investors Pull $2.6 Billion From Japan ETF as Yen Hedges Go Awry

  • Wrong way yen bets add to pain for Japan stock buyers abroad
  • Outflows tops among almost 2,000 U.S.-based funds this year

One of the world’s biggest exchange-traded funds that invests in Japan is delivering a double dose of pain to foreign investors.

The $10.3 billion WisdomTree Japan Hedged Equity Fund, which buys stocks listed in Tokyo and shields them against fluctuations in the yen, has plunged 13 percent this year. That’s more than double losses in the $17.6 billion iShares MSCI Japan ETF, which doesn’t seek to protect against currency risk. With losses mounting, investors have fled for the exit, pulling $2.6 billion, tops among almost 2,000 U.S.-domiciled exchange-traded funds.

The performance shows how one of the world’s most profitable trading strategies in recent years has started to backfire. In the last three years, buying Japanese stocks while hedging against losses in the yen proved a winning bet as Prime Minister Shinzo Abe’s efforts to spark the nation’s economy fueled a rush into stocks and weakened the nation’s currency. With the outlook for the world economy worsening to start the year, the trade has soured.

“We’ve seen a lot of that fast money come out of these hedged products this year,” said Will Wall, head trader at Richmond, Virginia-based RiverFront Investment Group, which manages more than $5 billion.

Worst Hit

Currency-hedged ETFs are falling out of vogue globally as a two-year rally in the dollar, fueled by the diverging central-bank policies of the U.S., Europe and Japan, looks to be running out of steam. Almost $4 billion has exited exchange-rate protected products this year, after the strategy absorbed $47 billion of inflows in 2015, according to data compiled by Bloomberg.

Yen-hedged products have borne the brunt of outflows amid the currency’s 7.8 percent rally versus the greenback this year. The yen touched 110.67 yen per dollar Thursday, the strongest since October 2014 and 11 percent higher than than the median three-month forecast of more than 60 analysts surveyed by Bloomberg late last year.

Hedge funds have pivoted from betting against the yen at the start of this year to buying the most futures contracts that benefit from further gains since 2008, data from the Commodity Futures Trading Commission show.

“It’s very hard to make money trading currencies,” said Gary Stringer, chief investment officer at Stringer Asset Management LLC in Memphis, Tennessee, which oversees about $315 million. “It sounds great while it’s working, but then you get burnt on it and people are going to shy away.”

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