Japan Long/Short Equity Gets That Sinking Feeling in 1Q07

"It is not the employer who pays the wages; he only handles the money. It is the product that pays wages."

Henry Ford (1863-1947), American automobile engineer and manufacturer

As global investors focus on first quarter performance of international investment holdings, the early showing by Asia and Japan focused hedge funds does not look particularly good.

For comparsion sake, consider some of the region's traditional market indices through the end March 2007 (with performance denominated in local currency terms) : Japan' Nikkei 225 Index +2.06%; TOPIX +1.94%; Shanghai A shares +18.87%; Singapore Times Straights +8.22%; Korea KOSPI +1.26%; Taiwan Weighted Index 0.78%; Thailand SET -0.90%; MSCI Pacific Free +2.80% and MSCI Pacific Free Pacific ex-Japan +4.93%. The bottom line is pretty much positive across the board, especially if Japan is excluded, which was a recurring theme in calendar year 2006.

Now take a look at hedge fund performance. Data commentary here is restricted to the universe provided by a well-known Swiss bank that is distributed on a weekly basis. The time series is mostly through end-March for the vast majority of funds.

Asia Long/short Equity. For 24 funds, total AUM of US$10.2 billion, average fund AUM of US$430 million. The average end Mar performance was 0.72%, with average YTD performance 0.68% on an equal-weighted basis. The performance spread was wide from +5.99% to -9.29%. The % of funds that were "winners" over Mar was 83%, and on a YTD basis 71%.

Japan Long/Short Equity. For 64 funds, total AUM of US$13.8 billion, average fund AUM of US$215 million. The average end Mar performance was -0.84%, with average YTD performance -0.03%. The performance spread for YTD was wide from +7.61% (for Steel Partners an investor activist) to -6.92% (for GCI's Rubato). The % of funds that were "winners" over Mar was 18%, while on a YTD basis 46%.

China Long/Short Equity. For a very small universe of 4 funds with AUM of US$661 million, average AUM of US$165 million, average monthly performance was 2.90%m with YTD performance of 13.22%. The performance spread was +26.97% to +13.00% on a YTD basis.

Bottom line is that being an investor in Asia has been fairly hazardous over the last 3 months. Further, investing in Japan has been even more of an issue, and that after taking fees into acount suggests that a passive, beta oriented approach was probably the best option. It might also suggest that investors need to be more open minded and creative in terms of alpha generating strategies in the region e.g. land, Asian real estate or REITS, gambling in Macao, or even activists.

Mahalo.