Algebris’s Wager on Japan Abenomics Boosts Hedge Funds’ Returns

Algebris Investments LLP, a U.K. hedge fund with $1.2 billion in assets, has boosted investments in Japanese financial stocks on bets that Prime Minister Shinzo Abe will move more aggressively to end deflation.

Algebris Global Financials Master Fund and Algebris Long Only Global Financials Fund returned 12 percent and 11 percent respectively this year through Feb. 14, said Ivan Vatchkov, the chief investment officer of Algebris’s Asian unit. Japan accounts for the biggest positions in the funds as they bought shares of major banks, insurers and real estate companies, Vatchkov said without naming the companies.

Investors, including billionaire George Soros, are wagering on Japan amid expectations that Abe’s administration will accelerate efforts to end more than two decades of deflation and boost the economy after he was elected in December. The benchmark Topix stock index is among the best-performing major indexes worldwide in the past three months as Abe announced spending increases and pressured Japan’s central bank to boost monetary easing.

“On the equity side, we are very aggressively positioned on the ‘Abenomics’ story,” Vatchkov said in an interview in Singapore yesterday. “We still see a lot of skepticism because people who have invested with Japan in the past 10 to 15 years have been disappointed so many times. But it seems to us, at least, the Japanese political establishment is very serious this time.”

The funds’ gains compare with the 2.2 percent increase in the Eurekahedge Hedge Fund Index in January.

Coco Fund

Algebris also is seeking to raise $1 billion over the next year for its $1 billion Algebris Coco Credit Fund, said Vatchkov. The fund, which invests in contingent convertible bonds, or CoCos, that regulators have earmarked as a vital part of bank buffers against future losses, returned 56 percent in 2012, making it the fourth-best performer globally among hedge funds with more than $100 million in assets, according to data compiled by Bloomberg.

Algebris last month hired Richard Surrency, former executive director and the head of transition management for Asia Pacific at Morgan Stanley in Singapore, as part of its fundraising efforts, said Vatchkov.

“A lot of the long-only and pension managers have to have returns,” he said. “The push that we’re making for the credit fund is to fund-raise from Asian investors who are faced with matching their future liabilities with their assets as yield and traditional bond asset classes have compressed to record lows.”

‘Pendulum Swings’

The Algebris Global Financials Master Fund is a long-short equity fund focused on banks, insurance, diversified financials and real estate, while the long-only fund invests based on the same strategy without taking short positions, or bets on falling securities. The master fund returned about 13 percent in 2012, while the long-only fund returned 34 percent, according to letters to investors.

Financial stocks provide the best investment opportunities this year as the “pendulum swings from credit to equities,” Algebris said.

In Japan, mega banks will benefit from reflationary themes such as higher loan margins and an increase in the value of their stock holdings, Vatchkov said. Algebris also sees opportunities in Europe, such as in Russian financials, he said.

Soros made almost $1 billion since November from bets that the yen would tumble, and is wagering on an increase in Japanese stocks, a person close to the billionaire’s $24 billion family office said earlier this month. Money managers, including Jeffrey Gundlach of DoubleLine Capital LP, have said Japanese stocks are set to rise as the country takes steps to weaken its currency, which helps exporters such as Toyota Motor Corp. by boosting the value of overseas sales.

“It’s not going to move in a straight line,” Vatchkov said. “But if Abe gets it right, the long-term implications for Japanese banks are enormous.”

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