As shown in the chart above, Japan-focused hedge funds significantly outperformed the Preqin All-Strategies Hedge Fund benchmark in 2015 (+6.19% vs. +1.89%, respectively). However, macroeconomic headwinds in the first two months of 2016 caused many funds to suffer sizeable losses. Japan-focused hedge funds have a year-to-date return of -5.09%, with this recent underperformance likely the result of the Bank of Japan’s decision to move interest rates to -0.1%, causing sudden volatility in the public markets.
Despite this, Japan-focused funds returned -1.18% over the past 12 months. Although still recording a loss, this outperforms both North America- and China-focused funds, which returned 3.26% and -4.33% respectively.
The impact that equity strategies have had on the performance of Japan-focused hedge funds is revealed when we compare the Japan-focused equity strategies benchmark with macro strategies funds. Equity strategies returned -5.02% over 12 months against the 4.64% return achieved by macro strategies, which is largely due to the economic slowdown in China – a market of high strategic importance for Japan’s exporters.
Although many are now questioning the efficacy of Prime Minister Shinzo Abe’s economic reform package, there is widespread recognition that corporate governance in Japan has improved under Abe’s premiership. There is also a renewed focus on shareholder value, with share buybacks reaching record levels in 2015 and numerous companies announcing plans to increase dividend payments, which may see equity strategies hedge funds regain momentum.
With the final draft of the TPP trade agreement currently making its way through the various legislatures of signatory states, there are interesting developments on the horizon for the macroeconomic environment in Japan. The success of Japan-focused hedge funds in 2016 is likely to be greatly affected by the market reaction that these reforms create.