Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

It's rare for such a traditional institution as Japan Post Bank to engage in contrarian investing. Going against the grain could, however, prove a smart move.

The investment division of the country's second-largest lender by market value is considering backing smaller or newly created hedge funds in Asia as it seeks higher returns.  That's surprising, considering the $2 trillion asset manager is generally conservative and the past 12 months were tough for hedge funds.

Forgettable
Even after recovering from sell-offs in February and July, global hedge funds still aren't where they were a year ago
Source: Hedge Fund Research; Bloomberg

The situation is particularly bad in Asia, where Japan Post Bank plans to focus.

Investors withdrew $6.3 billion from Asian hedge funds in the first six months of 2016, making them the worst hit globally, data from eVestment show. Eurekahedge's Asian Hedge Fund Index is on track for its first yearly decline since 2011, down 0.3 percent through July.

What's worse, the problems that have plagued the industry still haunt it. Part of that is a result of hedge funds' own success. They attracted so much interest over the past few years that many of the investing strategies that would have worked in the past are ineffective. Assets under management globally increased 76 percent since 2009 to $2.74 trillion. It's hard to get stellar returns on so much capital.

Price of Fame
Hedge funds have become so successful raising money they're now having trouble investing it
Source: Barclay Hedge
* As of March 31, 2016.

The other problem dogging the industry is ultra-low and negative interest rates.

Central banks have provided a boost to all assets with long duration, from real estate to private equity, Ben Inker, the co-head of asset allocation at Boston-based value shop GMO, said in a quarterly letter to investors. The opposite is true for assets that are less sensitive to interest rates because of their shorter-term horizon, such as hedge funds. Given that the Fed, the European Central Bank and the Bank of Japan are nowhere near normalizing monetary policy, that hurdle will remain.

Regardless, Japan Post Bank has good reason to bet on hedge funds, especially the newer and smaller ones. Those are more likely to achieve outstanding returns, especially if they have talented managers.

As for interest rates, money managers are learning how to deal with the new reality they have created. Macro funds, for instance, are throwing out traditional interest rate differential calculations when looking at carry trades and betting instead on the potential appreciation in one currency versus another, a phenomenon that helps explain the rally in the New Zealand and Australian dollars after the countries' reserve banks cut interest rates.

Finally, research shows that the worst-performing stocks of the past couple of years tend to outperform in following periods, and that applies to other asset classes as well. With hedge funds pretty much the most beaten up over the past 12 months, they're in good stead.

You wouldn't immediately think it, but Japan Post Bank's more aggressive strategy seems promising.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net