Hedge funds rediscovering taste for Japan

By Nishant Kumar and Chikafumi Hodo

HONG KONG/TOKYO | Tue Feb 22, 2011 5:24am EST

HONG KONG/TOKYO (Reuters) - Hedge funds are turning attention to
Japan once again and are set to attract more capital on expectations
a pick-up in corporate activities there like M&A and share buy-backs
would yield strong returns.

The resurgent interest in Japan could mark a turn in the fortunes of
the country's hedge funds industry, which has seen a sharp drop in
assets and the number of funds since 2006 as the market peaked.

Hedge funds are betting the current environment is ideal for
strategies such as event-driven and long/short, given that many
companies are trading at low valuations and funding is cheap --
conditions ideal for M&As.

A stronger yen has prompted domestic firms to buy new production
plants abroad and go in for deals. In a symbolic move, Japan's two
major steel makers, Nippon Steel Corp (5401.T) and Sumitomo Metal
Industries (5405.T) have announced merger plans..

Other factors favouring a relook at Japan are the recent shift in
capital flows in favour of developed markets, strong corporate
profitability -- which has left companies with about a record $2.5
trillion in cash -- a rebound in exports driven by robust demand in
fast-growing Asia and hope that the economy is heading towards a
moderate recovery.

A vast liquid market and return of flows into Japanese stock mutual
funds are also seen as positive.

"The feedback from our Japanese prime brokerage client base as to the
opportunity set and expected returns for 2011 has been more positive
than previous years," said Marlin Naidoo, hedge fund capital group
head in Asia-Pac for Deutsche Bank (DBKGn.DE).

"Additionally we are also seeing pan-Asian managers materially
increasing their exposure to the Japanese market."


While large inflows are not coming yet, money will start pouring in
the next two to three months as investors were conducting final due
diligence, several prime brokers said.

Many hedge funds have given up on Japan, with collective assets under
strategy plunging more than 50 percent from 2006 to about $20 billion
now, data from fund tracker AsiaHedge shows.

Their number has dropped by about a fourth to nearly 200 during the
period, according to data from Eurekahedge.

Still, there are signs of gradual improvement and many of those who
have survived are increasing assets. Eurekahedge sees assets of hedge
funds it tracks rising by two-thirds in 2011.

Hedge funds such as Instinct Capital and Symphony Financial Partners
earned 33 percent and 20 percent, respectively, in 2010 when the
benchmark Nikkei index .N225 was down about 3 percent, indicating it
was possible to make big returns in Japan.

In the latest vote of confidence, Tiger Management, founded by hedge
fund industry pioneer Julian Robertson, last month seeded Hong
Kong-based Nezu Asia with $50 million, part of which went to Japan
focused equity strategy Nezu Kuma Fund.

Source: Reuters.Com