Japan's Loss of Alpha?
"Have regard for your name, since it will remain for you longer than a great store of gold."
The Apocryphia, Ecclesiasticus 41:12
Latest talk in Asia has it that the allocation arm of the region's most prestigous prime broker has redeemed all of its exposure to Japan hedge funds. Who would have thought that! The same institution had managed accounts with negotiated lower fees and capacity with several big name Japan hedge fund specialists back in 2002/03 - a time when Japan was not yet the "ninki-mono" or popular investment vehicle on the global investment block.
Then, when the Nikkei 225 took off those managers insisted on higher fees and their own capacity terms. The famed investor and its clients were effectively given their marching orders as the whole world's investment community led by American and Swiss-based fund of hedge funds piled in.
That was then. Today, Japan Long/Short managers face another problem - poor returns especially as neighbouring markets like China, Korea and others have been doing well.
A quick glance at the Bank of Bermuda/AsiaHedge Japan Long-Short Equity Index and an average of mutual fund returns adopting a regional focus of the Pacific Basin (courtesy of Lipper)illustrates the dilemma.
On a calendar year basis, the hedge funds had higher absolute returns in 3 out of last 8 years, but they underperformed the last 4.5 years. This last fact points to the problem that many investors faced. They allocated to hedge funds in Japan at a time when they would have been better served focusing on mutual funds with a broader regional allocation mandate.
For the period Jan-2003 through Jun-2007, Pacific region mutual fund returned an average of 25.83% each year, with a 12.16% annualized vol for a 1.56 Sharpe. This compared to Japan Long-Short Equity Index (US$) which returned 9.50% on 5.95% vol. and a Sharpe ratio of 0.73. Clearly then, it paid on an average absolute return basis and on a risk-adjusted return basis to have been (and to be now) nvested in mutuals and not hedge funds.
This factor alone has "chased" the most sophisticated institutional investors out of Japan Long-Short Equity strategy and into making broader regional allocations. In this light, it is hardly surprising that Japan Long-Short Equity continues to lose supporters and assets.
And there is no favorable near term prospects in sight, which again suggests that hedge fund managers will do best if they broaden their investment horizons beyond that of simply being in Japan. Until investors understand that Japanese equities actually have a valuation argument depressed returns might continue. But then, the contrarian in me is beginning to think that just when investors are starting the bail out is probably the "safest" time to step in. Japan may be in for a long-awaited rebound...and even GS may have made a mistake in getting out at the wrong time! At the end of the day though we all know the economy has to perform which it has not.
Mahalo
"Have regard for your name, since it will remain for you longer than a great store of gold."
The Apocryphia, Ecclesiasticus 41:12
Latest talk in Asia has it that the allocation arm of the region's most prestigous prime broker has redeemed all of its exposure to Japan hedge funds. Who would have thought that! The same institution had managed accounts with negotiated lower fees and capacity with several big name Japan hedge fund specialists back in 2002/03 - a time when Japan was not yet the "ninki-mono" or popular investment vehicle on the global investment block.
Then, when the Nikkei 225 took off those managers insisted on higher fees and their own capacity terms. The famed investor and its clients were effectively given their marching orders as the whole world's investment community led by American and Swiss-based fund of hedge funds piled in.
That was then. Today, Japan Long/Short managers face another problem - poor returns especially as neighbouring markets like China, Korea and others have been doing well.
A quick glance at the Bank of Bermuda/AsiaHedge Japan Long-Short Equity Index and an average of mutual fund returns adopting a regional focus of the Pacific Basin (courtesy of Lipper)illustrates the dilemma.
On a calendar year basis, the hedge funds had higher absolute returns in 3 out of last 8 years, but they underperformed the last 4.5 years. This last fact points to the problem that many investors faced. They allocated to hedge funds in Japan at a time when they would have been better served focusing on mutual funds with a broader regional allocation mandate.
For the period Jan-2003 through Jun-2007, Pacific region mutual fund returned an average of 25.83% each year, with a 12.16% annualized vol for a 1.56 Sharpe. This compared to Japan Long-Short Equity Index (US$) which returned 9.50% on 5.95% vol. and a Sharpe ratio of 0.73. Clearly then, it paid on an average absolute return basis and on a risk-adjusted return basis to have been (and to be now) nvested in mutuals and not hedge funds.
This factor alone has "chased" the most sophisticated institutional investors out of Japan Long-Short Equity strategy and into making broader regional allocations. In this light, it is hardly surprising that Japan Long-Short Equity continues to lose supporters and assets.
And there is no favorable near term prospects in sight, which again suggests that hedge fund managers will do best if they broaden their investment horizons beyond that of simply being in Japan. Until investors understand that Japanese equities actually have a valuation argument depressed returns might continue. But then, the contrarian in me is beginning to think that just when investors are starting the bail out is probably the "safest" time to step in. Japan may be in for a long-awaited rebound...and even GS may have made a mistake in getting out at the wrong time! At the end of the day though we all know the economy has to perform which it has not.
Mahalo
posted by Franklin Scruggins | 8:33 AM
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