Shrinking Japan Hedge Fund Assets Pummel Broker Stocks

"The only function of economic forecasting is to make astrology look respectable."

John Kenneth Galbraith
Economist and writer, 1908-2006

News continues to be lousy when it comes to Japan. According to recent data out of Eurekahedge, the Singapore-based hedge fund data and third-party marketing firm, Japan hedge fund assets are on the decline.

Japanese hedge funds lost a combined US$10.9 billion in 2007, through poor performance and after US$7.7 billion of investor redemptions, according to Eurekahedge.

Including US$22.4 billion of new money, Asian hedge funds outside Japan grew by US$35 billion to US$101 billion last year.

In the 2003-05 period Japan's hedge fund industry comprising Japan-focused, Asia-focused as well as globally-focused funds exploded to US$55 billion.

One clear implication of hedge fund assets falling off a cliff in Japan is to negatively impact the profitability of Japan's brokers. Transaction-related revenues are likely to continue their recent decline with the big picture that Nikko, Daiwa and Nomura might expect their respective share prices to remain under pressure.

For example, recent share price data from Bloomberg shows current stock price versus their 2007 high for Nikko Cordial (before delisting on 1/22/08) : Yen1,364 vs. 1,780 (minus 23%); Daiwa: Yen970 vs. 1,673 (minus 42%); and, Nomura: Yen1,609 vs. 2,870 (minus 44%).

Even for Sparx (the biggest Japan-based hedge fund shop in the region that is publically listed) the price action has reflected their poor performing Japan franchise so far this year with recent price at Yen39,000 vs. 120,000 high in 2007 or minus 67%.

Times are likely to remain tough among Japan's brokers especially in terms of pushing their synthetic prime brokerage operations in London and New York if firmwide balance sheets are shrinking and hedge fund assets continue to drop in Japanese financial markets. Mahalo.