As one of the world’s biggest investors in hedge funds, it is Raymond Nolte’s job to find traders who can navigate even the toughest markets. Right now, he trusts nobody to do that in Japan.
The chief investment officer of SkyBridge Capital has zero exposure to Japan-focused hedge funds, saying that unprecedented monetary stimulus has made the nation’s debt and equity markets too distorted to manage. For Nolte, the situation in Japan is an extreme version of what is happening around the world as central banks use unconventional measures to spur economic growth.
“The current environment for Japanese assets is very difficult to manage with any certainty,” Nolte said by email. He helps oversee about $13 billion at SkyBridge in New York and is chairman of the firm’s manager selection committee.
Avoiding hedge funds in Asia’s second-largest economy has been a smart move in recent months. They lost about 2 percent on average in June, according to Eurekahedge Pte, trailing peers in Europe, Asia and the U.S. after Britain’s vote to leave the European Union sent Tokyo’s stock market tumbling and sparked a surge in the yen.
Brexit was just the latest setback for Japan-focused managers who have struggled to anticipate how the central bank’s policy of negative interest rates and asset purchases would impact markets. Eurekahedge’s Japan index has dropped about 5 percent over the past six months, its deepest slump since the global financial crisis.
The rough patch threatens to exacerbate client outflows after investors pulled about $974 million from Japanese hedge funds in the first quarter, six times more than they did in the same period last year, according to data compiled by Hedge Fund Research Inc. That trend is unlikely to reverse any time soon, said Nolte, who favors U.S. credit and mortgage assets and has “modest” exposure to Europe. He declined to comment on SkyBridge’s performance.
This year’s losses in Japan have been widespread. The SFP Value Realization Fund, which posted four straight years of double-digit gains through 2015, dropped 16 percent in the first five months of this year. Simplex Asset Management Co.’s Japan Value Fund, which oversees the equivalent of $135 million, is down 17.4 percent through July 21. Two of the three hedge funds run by Asuka Asset Management Co. have lost money this year, with the firm’s $8.4 million long-short equity fund dropping 10 percent.
Some managers are struggling as market swings increase, according to Gawain Barnard, whose Kriya Japan Alpha Segregated Portfolio has declined 6 percent this year. He is now holding a smaller number of positions, saying they are easier to manage in a volatile environment.
“Once trends are set, they run to extremes and beyond historic levels in many cases,” Barnard said.
Price swings in Japan’s bond market reached the highest level since 1999 in April and are still 60 percent greater than the five-year average. Yields on maturities as long as 10 years have turned negative. Volatility in the equity market over the past 60 days is 33 percent higher than the norm.
June 24 was an especially gut-wrenching day. While the session started with rising shares and a weaker yen, markets quickly reversed as traders realized that Britain had voted to leave the EU. When the dust settled, the Topix was 7.3 percent lower and the yen had gained 3.9 percent.
“We did well earlier this year, but we gave it all back even faster,” said Michael Trace, a portfolio manager at Gordian Capital, whose Japan-focused Start 22 Fund was down 2.6 percent last month.
Japanese markets reacted so strongly to the Brexit shock because they are among the most liquid in Asia, allowing traders around the world to use the country as a proxy for global risk appetite. That attribute has proven challenging for Japan-focused managers who tend to pay more attention to corporate valuations, according to Motoyuki Sato, a general manager and researcher at Man Group Japan Ltd., a unit of the world’s largest publicly traded hedge fund manager.
Some funds “suffered because stock price moves were rather isolated from company fundamentals and stock valuations,” Sato said.
Over a longer time horizon, the performance of Japanese funds looks more impressive. Even after this year’s slump, the country’s Eurekahedge index has increased 16 percent in the past three years, versus a 14 percent gain in the research firm’s global gauge and a 10 percent increase in the Topix.
Not all Japan funds are losing money this year. The $100 million GCI Systematic Macro Fund, run by Kyo Yamamoto, surged 30 percent in the first half thanks to timely wagers on the yen and the pound. Akito Capital Co.’s $981 million Akito Fund, which mostly bets on rising stocks even though it has the ability to take short positions, gained 5.9 percent in the same period. Hayate Partners Pte’s equity long-short strategy rose 4.6 percent.
A simple approach has worked best for Simon Kitson, who helped generate an 8.3 percent return through June for Blue Sky Alternative Investments Ltd.’s Dynamic Macro Portfolio fund.
The firm’s computers focus on just one variable, an adjusted measure of money supply, to make bets across major countries. That methodology is signaling an optimistic stance on Japan now, though Kitson is quick to warn that the country’s expansionary monetary policy is unsustainable.
“Japan is printing the money at the fastest pace in the developed world,” he said.
Expectations that policymakers will boost monetary and fiscal stimulus even further have sent the Topix up 9.7 percent over the past two weeks.
Traders can almost certainly expect more volatility this month as the Bank of Japan holds a policy meeting on July 29. Most analysts predict the central bank will escalate its stimulus, whether through stepped-up bond buying, more purchases of exchange-traded funds or another rate cut.
For SkyBridge’s Nolte, it is better to avoid Japan altogether than rely on fund managers to guess how such unprecedented easing will play out in markets.
The nation’s stimulus creates “anomalies that don’t necessarily reflect the value of assets in a free-market environment,” he said. “There are better strategies available in other markets.”
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