Ex-JPMorgan Asset Manager Osezawa Plans New Japan Hedge Fund

Date: Friday, February 5, 2010
Author: Tomoko Yamazaki and Komaki Ito, Bloomberg

J-Flag Investment Co., a Japanese hedge-fund advisory firm, plans to start a new long-short fund that will target Japan’s smaller companies this year after its first fund outperformed the benchmark since inception in 2009.

The Tokyo-based firm is talking to potential investors including Japanese financial institutions that may become an anchor investor of the planned new offshore-fund, according to Hisashi Osezawa, chief executive officer of the company, declining to name the companies. The firm aims to start the fund in April or May with initial capital of as much as 1 billion yen ($11 million), he said.

The new fund will employ the same strategy as its first hedge fund, Simplex J-Flag Absolute Return Fund, and will focus its investments on Japan’s micro-small-cap companies, with a market value of less than 30 billion yen, that are mostly not covered by analysts and less-favored by investors, Osezawa said. Companies including West Holdings Corp. and JP-Holdings Inc. contributed to the performance of its first fund, he said.

“Most investors aren’t paying attention to Japan’s small- cap market nowadays and that creates a great opportunity to find the hidden jewels,” Osezawa, 45, a former senior fund manager at JPMorgan Asset Management, said in an interview in Tokyo yesterday. “My bet is that over the next two to three years, Japan’s small-cap stocks will start to attract some interest from a wider group of investors.”

Outperformer

The $10 million-Simplex J-Flag Absolute Return Fund, managed by Tokyo-based Simplex Asset Management Co., has returned 8.5 percent since inception in July 2009 through January, outperforming the 4.5 percent gain by the Jasdaq Stock Index, a benchmark for Japan’s smaller companies.

Osezawa says he bases his investments on companies’ earnings growth rather than trends or market themes.

Among the biggest contributors to the performance was its bet on Hiroshima prefecture-based West Holdings, which installs solar power panels on houses. The fund in July began investing in the stock, which more than tripled by the end of 2009.

JP-Holdings, a Nagoya prefecture-based operator of daycare centers, was another contributor. Osezawa began tracking the company about four years ago and favored the stock because of its earnings growth, he said. The stock more than doubled in 2009 amid expectations the new government will implement measures to tackle the nation’s shortage childcare facilities.

Startups Slow

Osezawa, who founded his firm in June 2009, began investing in the Japanese market in 1997 and worked at Shinwako Investment Management and Wako Securities before his time at JPMorgan Asset, he said.

J-Flag’s entry to the hedge-fund industry last year came as assets raised by hedge-fund startups in 2009 fell 36 percent to $15 billion from the previous year, the lowest figure on record, as risk-averse investors remained reluctant to put money in the funds, a survey by AR magazine showed.

“Capital-raising remains tough for start-ups like us, but in terms of performance, it was the best time to enter the market,” Osezawa said. “We are slowly starting to see some traction from overseas fund of funds now.”

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