(This piece first appeared in Opalesque's AMB.)HT: All About Alpha:
GFIA addresses the subject of the resurgence in hedge funds in Japan in this month's issue of their research insights, asking is the recovery rational, or a false signal?
"Compared with when we last visited the topic two years ago, Japan seems to have regained investors' attention; it might even become a pain trade, too important to omit in the context of a global portfolio. Bloomberg reports that "the rally in Japanese stocks since new Prime Minister Shinzo Abe... is starting to stir investor interest in hedge funds", and it certainly doesn't discourage that Eurekahedge has just reported the best three month performance on record for their Japanese hedge fund index through February."
In their quantitative research piece, GFIA looked at the Japan absolute return universe, and quantified some of the characteristics of the constituent funds over the years. "We note however a precipitate drop in the number of listed funds since our last Japan-focused study; our final universe consists of 96 funds, less than half the number listed in May 2011.
A grizzly market watcher might comment that when there's been an exodus of alpha seekers from a market, those that are left should have a field day."
Funds drawn from the AsiaHedge and GFIA's own database were divided into three categories: long-only funds, long-short funds and market neutral funds. They then examined three risk-return attributes - returns of funds vs benchmarks; correlations analysis and gross and net exposures of long-short funds.
GFIA found that the three strategies studied showed clear and expected divergences in return profile, volatility of performance and correlations. "Long short funds had the best total returns, although market neutral managers delivered the steadiest performance as return profiles diverged according to strategy directionality. All three strategies did better than passive benchmarked investing from a risk-adjusted perspective, clocking higher returns at far lower volatilities. Benchmark correlations for long/short and long only funds actually dipped during downward/sideways trending periods, a testament to the managers' stock-picking skills, while those of market neutral managers spiked worryingly. Net exposures were wide ranging, whilst gross exposures have expanded since the summer of 2012, culminating in a sharp uptick in January 2013."...MORE
Japan as Hedge Fund Opportunity...
...The newsletter classified Japan-focused hedge funds into three groups: long/short, long only, and market neutral. It is an unequal division: the long-short class dominates, as 69% of the whole.
HF versus Topix or Mother
As you can see in the chart above, all of the three classes of hedge fund outperformed the relevant index, Topix 1000, (the brown line) in the period under scrutiny, from January 2004 to the present. Also, all of the lines except that reflecting the market neutral strategy show a sharp uptick on the right hand edge of the graph, reflecting the ascension of Prime Minister Abe and the aggressive policies of the Bank of Japan....MORE
