Japan-Focused Hedge Funds Seen Boosting Assets 20% on Abenomics

Japan-focused hedge funds may see their assets increase 20 percent this year on expectations that Prime Minister Shinzo Abe’s policies and stimulus measures will boost growth, according to Eurekahedge Pte.

About $3 billion could be added to the $15.1 billion managed by hedge funds investing in Japan at the end of April, said Satoshi Iwanaga, chairman of Singapore-based data provider Eurekahedge, which is hosting the 2013 Asia Hedge Fund Awards today. Of the increase, $1 billion may come from performance gains, while investors would allocate the rest, he said.

The increase would be the “first real recovery” since 2005 when funds focused on the world’s third-largest economy grew 56 percent to $33.6 billion as then Prime Minister Junichiro Koizumi led banking restructuring to boost growth, Iwanaga said. The Eurekahedge Japan Hedge Fund Index rose 17.7 percent this year through May as Abe’s policies dubbed Abenomics weakened the yen, helping exporters and boosting stocks.

“Japan is finally coming back,” Iwanaga said in an interview in Singapore on June 4. “The Abenomics euphoria has put a spotlight back on Japan. Investors are after those with high returns and Japan is where you can find that now.”

While investors withdrew money from the funds in the four months to January, the pace of redemptions has slowed since then and performance gains have led to an increase in total assets, Iwanaga said.

Below Peak

Still, assets at Japan-focused funds are more than 60 percent below a peak of $39 billion in 2006. Since then, performance lagged and the industry suffered scandals including covered-up losses at AIJ Investment Advisors Co. last year.

For Asia-ex Japan hedge funds also, the biggest hurdle is fundraising, Iwanaga said. Assets at these funds peaked in 2008 at $154.7 billion and have fallen to $123 billion following the global financial crisis in 2008 that was exacerbated by the collapse of Lehman Brothers Holdings Inc., Eurekahedge data show.

“Investors know that Asia is where there is still room for growth” in hedge funds given the economic prospects in the region, Iwanaga said. “The problem is that the region’s hedge funds don’t have the capacity beyond equity-related strategies.”

Over 70 percent of all Asian hedge fund capital continues to be concentrated in equity hedge strategies, compared with 27 percent for the global hedge-fund industry, according to Chicago-based Hedge Fund Research Inc.

Abe took office in December pledging a three-pronged strategy of aggressive monetary easing, fiscal stimulus and deregulation that investors have welcomed. The benchmark Topix index has gained 25 percent so far this year, making it the best-performing developed equity index, even after accounting for a 16 percent drop in the index since May 22.

The recent drop in Japan’s stock market is expected after the “rapid run-up amid Abenomics euphoria,” Iwanaga said. The actual effect of Abe’s policies are yet to be reflected in the economy, he added.

“The market simply went up too fast,” Iwanaga said. “It would have been unnatural to keep going at the same pace.”

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