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Abenomics Provides Much Needed Boost to Japan-Focused Long/Short Equity Fund Managers – July 2013

Following the re-election of Mr Shinzo Abe in December 2012, the Japanese government began an aggressive series of measures to revive the country’s sluggish economy. The three arrows of “Abenomics” consisted of fiscal stimulus, monetary easing and structural reforms, and served to bring the spotlight back to the world’s third biggest economy.

However, rather than embarking on a bull run, the Japanese equity markets experienced turbulence as investors continued to second guess whether the three arrows would be sufficient to revive the economy. The uncertainty felt by investors was not helped by hints from the US Federal Reserve that it might tighten its monetary policies, which elevated concerns about the sustainability of Japan’s own economic recovery.

Nevertheless, Japan focused long/short equity hedge fund managers took advantage of the unique opportunity to make a strong return in the markets, racking up performance numbers significantly in excess of their global peers. According to Preqin’s Hedge Fund Analyst, Japan-focused long/short equity hedge funds posted returns of 8.03% year-to-date up to May 2013, which represents the highest returns posted in the first five months of any year for over 10 years by these funds. In the first five months of 2013, global long/short equity hedge funds only posted returns of 3.77% in comparison.

As Japan focused long/short equity funds began their own bull run, it can be expected that Asia-Pacific-based institutional investors will soon sit up and take notice. Long/short equity funds remain the preferred strategy of choice of institutional investors based in the region, with over 45% of Asia-Pacific-based investors expressing a preference for the strategy. Nearly 53% of these long/short equity investors in Asia-Pacific will seek an Asian exposure when investing, providing Japan-focused fund managers an opportunity to expand their capital base.

Japan-based investors are the largest group of institutions taking advantage of the buoyant performance of Japan focused long/short equity funds, with 41% of the investors in these funds based in Japan. Eighteen percent of the investors in Japan-focused long/short equity funds are based in Australia and about 16% in Hong Kong. In terms of investor type, Japan-based pension funds make up the largest proportion of the investor pool (23%), followed by Australia-based superannuation funds (9%) and fund of hedge funds managers based in Hong Kong and Japan (8% each).

Although it has already been a less than a year since the launch of Abenomics, the preferences of these investors bode well for fund managers seeking to take advantage of the interest in Japan focused long/short equity vehicles by launching new funds. The majority of the investors in the Asia-Pacific region will consider investing in emerging managers and spin offs, with over 76% of these investors open to investing in emerging managers and 75% in spin offs. Nearly 55% of the investors are also open to providing seed capital.

Following the wave of new fund launches in the last few years, the fundraising environment remained challenging for new hedge fund managers in the region, but from recent evidence, Abenomics might prove to reignite interest in the wider Asia region.   

Posted by Ivan Jincheng Han on 01-Jul-2013

Keywords: hedge funds, long short equity, japan, abenomics, investors