Japan’s First Short-Biased Hedge Fund Bets Exporters Will Fall

Date: Thursday, June 4, 2009
Author: Tomoko Yamazaki and Komaki Ito, Bloomberg.com

Alphex Investments Co., the adviser to Japan’s first short-biased hedge fund, plans to sell exporters’ shares, wagering they’ll fall on a rising yen and weak global economy, boosting the fund that started in March.

“What we’re seeing right now is nothing more than a bear- market rally,” Ichiro Takamatsu, 44, chief executive officer of the Tokyo-based hedge fund advisory firm, said in an interview yesterday. “We’re going to see a really bad yen rally this year, and that will create an opportunity to profit on exporters.”

The firm started its ASB Opportunity Fund on March 3 with $25 million of seed funding from a New York fund-of-funds seeking to diversify its portfolio, said Takamatsu. The ASB fund, with a net short position at all times, is the first of its kind in Japan, he said.

Alphex’s flagship fund, a so-called long-short equity fund that invests in the Japanese market, returned 7 percent in 2008, beating rival Japan-focused hedge funds, which declined a record 12 percent, according to data by Singapore-based Eurekahedge Pte.

Takamatsu plans to sell shares of exporters in the auto and electronics industries in the coming months in anticipation that the U.S. economy and consumer sentiment will suffer more, with a “triple whammy” of falling equities, government debt and the dollar. He declined to name individual stocks.

The Topix index tracking transportation companies such as Toyota Motor Corp. has surged 42 percent this year, making it the second-best performer among the 33 industry groups that make up the benchmark. The 160 company Topix Electric Appliances Index, including Sony Corp. and Canon Inc., has gained 24 percent, the seventh-best performing industry group.

Reversal

Bridgewater Associates Inc., Highbridge Capital Management LLC and Farallon Capital Management LLC, which together oversee almost $80 billion, increased bets against Japanese companies in the past three months, filings to the Tokyo Stock Exchange show. The Topix climbed 28 percent in the three months through May, the most since 1953, with shares in the index trading at an average 41 times estimated earnings, the highest level among the 40 largest markets, data compiled by Bloomberg show.

U.S. Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday that the nation’s large budget deficits threaten financial stability and that the government can’t continue indefinitely to borrow at the current rate, sending the Standard & Poor’s 500 Index down 1.4 percent.

Takamatsu said he’s increased bets on selling so-called defensive sectors, such as drugmakers and utility companies, on the back of the recent rally in the Topix that’s contributed to a decline of about 20 percent in the fund since its launch. The Topix is up 31 percent from this year’s low on March 12.

He’s lowered his short positions in cyclical stocks such as trading companies and brokerage firms.

Strong Yen

In a short sale, a trader borrows stock and sells it in the hope it can be bought back later at a cheaper price.

“Short-biased managers tend to be viewed as more risky than long-volatility strategies, but with more direct impact on the portfolio during a drop in equity markets, if the strategy is executed properly,” said Kirby Daley, a senior strategist in Hong Kong with Newedge Group’s prime brokerage business.

Japanese manufacturers from Panasonic Corp. to Konica Minolta Holdings Inc. have cut jobs and are closing factories or scaling back spending plans amid an unprecedented export decline.

Meanwhile, the yen rose as high as to 87 per dollar in December and traded at about 96.20 today. A stronger Japanese currency decreases the value of a company’s earnings from overseas and makes its products more expensive abroad.

Eye Catching

Alphex, with total assets of about 8 billion yen ($83 million), is targeting more global investors, including fund-of- funds looking to diversify their portfolios after the worldwide hedge fund industry posted its worst performance on record in 2008 amid the global credit crisis.

“The performance of the short book in the flagship fund caught the eye of one of our investors and that’s how this fund started,” said Takamatsu, who previously worked at Cigna International Investment Advisors in Tokyo, where he headed the equity team and managed a Japanese stocks fund.

ASB has the capacity to take up to 30 billion yen, according to Takamatsu, who also aims to start a long-only fund and a pan- Asia long-short equity fund.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net