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Ex-Tower Sugihara Leads 17% Gain With Hayate Japan Hedge Fund

Date: Tuesday, December 8, 2009
Author: Tomoko Yamazaki and Komaki Ito, Bloomberg

Yukihiro Sugihara, a former analyst at Tower Investment Management Co., led his Japan-focused hedge fund to a 17 percent gain this year by concentrating on small companies that escape the attention of analysts and competitors.

The 2.4 billion yen ($27 million) Hayate Japan Equity Long- Short Fund invested mainly in companies with a market value of less than 100 billion yen to beat the 0.8 percent gain this year through October in the Jasdaq Stock Index, the nation’s benchmark for smaller companies.

Sugihara identifies small companies that are subject to little research by brokerages and are traded primarily by individual investors. The 31-year-old, who has also worked as a proprietary trader at Goldman Sachs Group Inc., then narrows his focus to companies that allow him access to senior management.

“Our job is to exploit the gap between what we see in a company and how other people view the stock,” Sugihara, who is chief executive officer of Tokyo-based Hayate Investment Co., said in an interview at his office yesterday. “When people eventually discover the quality that we’ve already found, that’s when prices start to take off.”

Hayate Investment aims to increase assets in the fund, whose gain compares with 5.1 percent for the Eurekahedge Japan Hedge Fund Index through November, to 10 billion yen over the next year, Sugihara said. The fund, advised by Hayate Investment, is managed by ManagementPlus (Singapore) Pte.

Taiko Pharmaceutical Co. and Foster Electric Co. were among the best performers in 2009 for the fund, whose investment team of two meets more than 1,000 companies each year.

Good Medicine

Osaka-based Taiko Pharmaceutical, known mainly for its Seirogan diarrhea medication, attracted the fund because Hayate discovered it also owned a patent for a disinfectant product that could help against swine influenza, Sugihara said. The stock has doubled since May when the fund made its investment.

The fund had long positions in about 48 stocks and short positions in about 33 as of the end of October. In a short sale, a trader borrows stock and sells it hoping it can be bought back later at a cheaper price.

Sugihara said he bet against concerns that Foster, a maker of earphones, would be squeezed by lower-cost Chinese manufacturers when he learnt that the Tokyo-based company was supplying earphones for Apple Inc.’s iPod and iPhones. In November, Foster more than doubled its full-year net income forecast. The stock has more than tripled this year.

Sugihara says he’s now focusing on companies that are providing “outsourcing” businesses such as Askul Corp., which sells office equipment products to medium and small-sized business offices through the Internet and facsimiles.

Demographic Trends

Companies seeking to profit from rising outsourcing demand as Japan’s population declines are also on the fund manager’s radar, Sugihara said, without identifying specific stocks.

The fund has returned more than 20 percent on a net basis since inception in March 2006, after executives at Internet provider Livedoor Co. were charged with fabricating earnings. The scandal sparked concerns about the finances of smaller companies and contributed to a 34 percent slide in the Japanese small-cap market that year, as measured by the Jasdaq.

Hayate plans to start a fund next year that will take a more active role in directing management of the small companies it invests in, Sugihara said, declining to elaborate.

Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices and participate substantially in profits from money invested.

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