Business / Financial Markets

Hedge fund's computer says sell Japan debt after 19% gain

by Finbarr Flynn and Komaki Ito


For Kyo Yamamoto, leaving investment choices to a computer rather than making his own calls has been the best strategy as unorthodox global monetary policies only worsen market volatility. Right now, the machine says sell Japan government bonds.

GCI Systematic Macro Fund, a Japanese hedge fund that earned 19 percent in the first two months of the year after buying the nation’s sovereign notes, has been switching toward selling, said Yamamoto, the head of the quantitative research and strategy group at Tokyo-based GCI Asset Management. The fund’s return since inception in February 2014 is 173 percent, he said. That compares with a 16 percent gain by the Hedge Fund Research’s Systematic Diversified Index of similar funds in the same period.

The fund, which employs a computerized model to invest in global exchange-traded securities, boosted Japanese government bond holdings into the start of 2016, while selling the Canadian dollar as a hedge, Yamamoto said. Asset managers are having to innovate to steer through choppy markets after the Bank of Japan’s adoption of negative rates sent a measure of JGB volatility to the highest since 1999, while global central banks ramp up monetary easing to avoid a collapse in growth.

“If you look at the market, what we’re seeing is just unbelievable, so to keep winning in this kind of environment based on judgment is tough,” Yamamoto said in an interview in Tokyo. “My way is follow the model and run based on its rules.”

On Friday investors drove the yield on the benchmark 10-year Japanese government bond to an unprecedented minus 0.135 percent, below the BOJ’s minus 0.1 percent deposit rate. Volatility in Japan’s sovereign debt over 60 days rose to as high as 5.48 percent on Friday, a level untouched in a decade and a half.

The volatility is making it difficult to manage portfolios because of big swings in asset prices within a single day, according to Yoshihiro Nakatani, a senior fund manager at Asahi Life Asset Management Co. in Tokyo.

“Unless you buy super-long bonds right now, you are going to be left behind,” Nakatani said. “But it’s like, ‘Is it really OK to be chasing after these securities at a time of record low yields?’ ”

Nakatani said he expects the BOJ to cut the deposit rate at least two more times to about minus 0.5 percent after central bank Gov. Haruhiko Kuroda indicated to lawmakers last week that such a level is theoretically possible.

Japan followed Switzerland, Sweden, Denmark and the European Central Bank in adopting negative interest rates after the economy contracted in the final three months of 2015. The BOJ now charges banks an interest rate of 0.1 percent on some of their reserves at the central bank.

The BOJ has “no other option” to adopt unconventional monetary measures in the current circumstances to support growth and inflation, Nouriel Roubini, chairman of Roubini Global Economics, told reporters in Tokyo on Friday.

“Five years from now, if there is not enough structural reform, if eventually the fiscal problems are not resolved, you are going to run out of monetary policy bullets,” Roubini said. “The right thing can be done and therefore there will be light at the end of the tunnel for Japan. So I would not give up on Japan.”

GCI Systematic Macro Fund has almost doubled assets under management in the past 12 months to about ¥9.1 billion, Yamamoto said. The fund’s investors are both domestic and foreign, he said.

While GCI’s model did not forecast the BOJ’s minus-rates policy, “it did signal that the central bank had to take some action, and indicated a favorable environment for investing in JGBs” amid low risk, said Yamamoto, who has a Ph.D. in economics from the University of Tokyo. The fund trades Japanese sovereign note futures rather than the underlying debt, he said.

“With the volatility in Japanese government bond markets, risk has increased so we are decreasing our position,” Yamamoto said.