Stock Picking, Large-Cap Rally Boosts Top Japan Hedge Funds

Pickers of small company shares and money managers who anticipated a year-end rally in large-capitalization stocks were the best performers among Japan-focused hedge funds last year.

Hayate Partners Pte’s Japan Equity Long Short Fund returned 19.4 percent in 2014, boosted by its holding in F&M Co., a small provider of book-keeping services whose shares surged 83 percent. The Monterey Japan Equity Fund gained 19.8 percent from shorting smaller-cap shares that dropped toward the end of the year and benefited from central bank monetary easings that lifted stocks of food and pharmaceutical companies.

Japan hedge funds beat global peers as the central bank eased monetary policy at the end of October, prompting investors to switch into stocks from bonds and sending the yen lower, helping large Japanese exporters. Japan hedge funds returned 5.4 percent, based on more than 90 percent of funds that have reported year-end returns to data provider Eurekahedge Pte. That compares with 4.4 percent for the global industry.

Short positions “paid off as foreign capital inflows in the second half supported large caps relative to their smaller peers,” said Mohammad Hassan, an analyst at Singapore-based Eurekahedge.

Asia ex-Japan funds returned 9.3 percent, benefiting from rallies in Chinese and Indian equities in 2014, which outpaced the Japanese stock market.

Shorting Small-Caps

The TOPIX Large 70 Index, which tracks the biggest and most liquid companies, rose for a third year, climbing 12 percent in 2014, with most of the gains taking place in the second half.

The TOPIX Small Index also added 12 percent, up for a third year. Periods of weakness from January to May, in August and October provided trading opportunities for funds with short positions in Japanese small-caps. Shorting involves investors selling borrowed stock, with the view prices will decline so they can make a profit when they repurchase it.

Those “got solid returns when the market declined,” said Manabu Washio, Asia Head of Aksia LLC, a New York-based research and advisory firm whose clients invest in hedge funds.

The Monterey fund’s investments in mid- and large-cap shares in the food and pharmaceutical sector, such as Kikkoman Corp., Kewpie Corp. and Shionogi & Co., got a boost from the additional monetary easing measures announced by the Bank of Japan on Oct. 31, Chief Executive Officer Kei Murata said.

Solar, Construction

Monterey also had short positions in Japanese solar-power companies whose shares dropped as solar-power tariffs were cut further, Murata said. It also took successful short positions in Lixil Group Corp. and Rinnai Corp., home-appliance companies whose shares fell after the consumption tax was increased last year, Murata said.

Lixil shares declined 11 percent last year and Rinnai lost 17 percent in the second half.

The fund also profited from long positions in construction companies early in 2014, and from retail companies which did well out of the booming Japanese tourism industry, such as Komehyo Co., whose shares more than doubled last year, and Don Quijote Holdings Co., which jumped 31 percent, Murata said.

Hayate invested in F&M on expectations the company’s sales will increase after the Japanese government required small businesses to improve their accounting to expand taxable income, said Kensuke Suzuki, a Singapore-based director at Hayate.

Activist Gains

Japan activist investors also did well, with the Classy Activist Fund returning about 39 percent in 2014, according to Kouichi Katano, the chief investment officer of Classy Capital Management Co.

The fund, with about 3 billion yen ($25 million) in assets under management, was helped when an engine maker in which it had invested agreed to Classy’s proposal for a dividend increase. Katano declined to name the engine maker.

Among other top-performing Japanese funds last year, Epic Valiant Fund, which takes both long and short positions in the equity market, returned 21.7 percent. Most of the gains in the $75 million were in the first half, said Katsuhiko Higuchi, the chief fund manager.

The 1.7 billion yen Hadoh V1 Fund got a boost from positions in mid- to small-cap Japanese equities, returning 20.7 percent, said the fund’s manager, Yukimasa Yamaji at Finnowave Investments.

“2015 could be another banner year for Japanese managers,” said Hassan at Eurekahedge. “A declining yen, against the backdrop of increased monetary easing and the prospects of a delay in a sales tax increase will continue to support Japanese corporate fundamentals.”

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