Abenomics drives Japan hedge funds to world's top performers

(c) 2013, Bloomberg News.

TOKYO — Japanese hedge funds are heading for record returns this year as investors bet that Prime Minister Shinzo Abe's policies will succeed in reviving the world's third-largest economy.

Stratton Street Capital LLP's warrant fund returned more than 300 percent, while the Hayate Japan Equity Long-Short Fund almost doubled. The Eurekahedge Japan Hedge Fund Index, which tracks about 80 funds, returned 24 percent in the 11 months through November, heading for the best year since the Singapore- based researcher began compiling data in 2000.

Japanese hedge funds swung from the world's worst performers in 2012 to the best as the central bank's reflation efforts put the benchmark Topix index on course for the biggest increase in 14 years and weakened the yen by 17 percent versus the dollar. Assets at the Japan-focused funds tracked by Eurekahedge increased $451 million in the second half of 2013, the most since the six months ended August 2011.

"Japan has come full circle for a lot of investors," said David Baran, co-chief executive officer of Tokyo-based Symphony Financial Partners. "Many investors felt that all Japanese companies were bad investments, which was patently inaccurate. Those investors who have dismissed Japan have been motivated to come back to the market by Abenomics."

Baran's $300 million SFP Value Realization Fund returned 73 percent this year through November, net of fees, according to a letter to investors.

The Eurekahedge Japan Index returned 6 percent in 2012, the worst performer among five geographical region indexes tracked by the data provider. This year's 24 percent return through November compares with a 7 percent advance in the global index, a 8.5 percent return by the measure tracking North American funds and a 12 percent increase in the Asian index excluding Japan.

Abe took office in December 2012 pledging a three-pronged strategy of aggressive monetary easing, fiscal stimulus and deregulation that investors have welcomed. The Topix has surged 50 percent this year, heading for the best year since 1999, when it gained 58 percent.

Bank of Japan Governor Haruhiko Kuroda, whom Abe picked for the job, began a monetary easing campaign of unprecedented size in April, pledging to double Japan's monetary base by boosting purchases of bonds and other financial assets to generate 2 percent inflation in about two years.

The slide in the yen's value helped bolster sentiment among large Japanese manufacturers to the highest level since 2007, a quarterly BOJ report on Dec. 16 showed.

"Abenomics has played a major role in the comeback of Japanese hedge funds but, equally important, is the gradual return of risk appetite amongst investors in the U.S. and Asia," said Ed Rogers, chief executive officer of Tokyo-based Rogers Investment Advisors. "The best-performing Japanese hedge funds have been a significant source of alpha for many years, and 2013 will hopefully serve as a catalyst for growth in the industry in 2014." Alpha refers to returns in excess of those of the benchmarks.

Among the best performers were warrant funds, which benefited from an increase in convertible-bond sales. Japanese companies raised a combined 631 billion yen ($6 billion) through convertible-bond offerings this year, the most since 2006, according to data compiled by Bloomberg.

Stratton Street's Japan Synthetic Warrant Fund returned 359 percent this year through November. The fund, which is offered in yen, benefited from a pick-up in the convertible bond market, according to the company.

The fund seeks to create geared exposure to the Japanese equity market through investments in asset-swapped convertible bonds and listed and over-the-counter warrants in companies that are quoted on Japanese stock exchanges, according to the U.K. manager.

The $33.3 million Northwest Warrant Fund Ltd. also benefited from the revival in Japan's convertible-bond market. It returned 208 percent this year through November, according to the firm. The fund buys convertible bonds, sells the fixed- income components of the securities through asset swaps and keeps the options to convert the securities into stocks.

Hayate's fund that bets on rising and falling stock prices returned about 92 percent through November in the fund it offers in yen, said Kensuke Suzuki, a Singapore-based director at Hayate Partners Pte. The fund, with about $50 million in assets, focuses on companies with a market capitalization of less than 100 billion yen, subject to little research by brokerages, according to Suzuki.

It has benefited from investments in a maker of water purifiers as well as a company that develops adhesives for diapers, which has seen rising demand in Asia, Suzuki said, declining to name the stocks.

"Investors' focus on Japan has increased globally, thanks to Abenomics," Suzuki said, adding that inquiries for possible investments into the fund are up this year. "With an increase in interest for overall Japan, more smaller companies will come under the spotlight, which is good all-in-all."

Prospects that the U.S. Federal Reserve will start tapering economic stimulus will continue to benefit Japan, said Symphony's Baran.

The BOJ on Dec. 20 kept its record easing while signaling progress in its fight against deflation. The U.S. Federal Reserve Dec. 18 said it would taper the pace of its bond-buying program, helping weaken the yen to a five-year low against the dollar.

"I expect more of the same in 2014 and it may accelerate as the Fed tapering commences, while the BOJ keeps printing money," said Symphony's Baran. "The yen will continue to depreciate further, boosting corporate earnings and making equities more attractive."

_ With assistance from Bei Hu in Hong Kong.

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