Hedge Funds Flock to Japan as Market Heats Up, Reports Reuters

By Summer Zhen

HONG KONG – Japan has distinguished itself in Asia’s overall sluggish hedge fund sector, which is valued at $400 billion, by witnessing an influx of new fund launches, even as other regions experience closures. This trend highlights that the significant market volatility seen in August has not hindered the resurgence of Japanese capital markets.

In Asia, hedge fund liquidations have outnumbered new fund launches this year, largely due to the struggles of China’s stock market. In contrast, the number of funds focused on Japan has seen a net gain of over ten during this period, as indicated by data from Preqin.

Looking ahead, at least five additional Japan-focused funds are slated to launch or are preparing to debut in the latter half of the year, employing a range of strategies from equity long-short to quantitative trading, as per sources familiar with their plans. These new entrants are garnering positive reactions from investors and come from both domestic and international origins.

This shift indicates a growing confidence in Japan, a market that has long been overlooked by hedge funds and many investors, and which has recently faced significant volatility including the largest one-day stock market drop since 1987. Yet, it appears that the financial markets are rejuvenating after being marginalized for decades.

"Soichi Utsumi, the founder of Shinka Capital Management, emphasized, ‘Japan is finally changing in a positive way, with inflation and wage growth.’ He noted the growing trends he has observed throughout his career in finance."

Japanese equity markets reached all-time highs in July, driven by foreign interest and corporate governance reforms. With interest rates moving into positive territory and on the rise, investor sentiment is becoming more optimistic as the economy shows signs of growth.

Utsumi mentioned that his fund will focus on governance changes and the prospects of rising interest rates, which resonate well with current investor interests. Jon Caplis, CEO of hedge fund research firm PivotalPath, noted, “We’ve seen more interest in Japan-focused managers.”

The resurgence of Japan’s markets faced a setback in early August due to a rate hike from the Bank of Japan and disappointing U.S. economic data, which led to a sharp yen appreciation and a downturn in the stock market. However, hedge funds remain undeterred by this volatility.

For instance, Hong Kong’s ActusRay Partners, which manages $700 million, is preparing to launch a new Japan strategy later this month, aiming to raise $100 million by year-end. The quant fund views the recent market selloff as an opportunity, particularly as a crowded short position on the yen has been unwound.

Tetsuo Ochi, CIO at MCP Group – a $2.5 billion alternative investment firm primarily assisting Japanese institutions in global investments – pointed out that rising rates might lead to market volatility but can also eliminate "zombie companies" that fail to thrive, ultimately benefiting long-short strategies. Ochi’s firm recently launched a unique Japan-focused fund of funds and attracted a significant investment from Japanese insurer Dai-ichi Life, aimed at fostering emerging managers and reviving Japan as an asset management hub.

New additions to the Japan-focused funding landscape include the multi-manager Penglai Peak Offshore Fund and a new strategy from OQ Funds Management.

Nevertheless, a Preqin survey from August revealed that a growing number of global investors plan to reduce their hedge fund allocations due to underperformance compared to benchmarks. Regardless, Japan long-short equity funds have demonstrated resilience, reporting positive returns in 70% of quarters over the past five years through the second quarter of 2024.