Japanese crisis triggers $800m hedge fund swing

Prior to the earthquake on March 11, hedge funds had been using futures contracts to mainly bet that that the Nikkei 225, the index for the Tokyo Stock Exchange, would fall, according to French bank Societe Generale in its latest update on the hedge fund sector.

However, from the week of March 15, hedge funds shifted to a net long exposure to the Nikkei, meaning that they were now mainly betting the index would rise.

In fact, the crisis caused a $794m swing in just two weeks, according to Societe Generale figures. On March 1, hedge funds were net short-sellers of Nikkei futures by $330m. By March 22, they held a net long position worth $464m on the expectation that the Nikkei would rise.

John Livingstone, a portfolio manager for an Asia focused fund of hedge funds run by Aberdeen Asset Management, said hedge funds took a bet that Japanese government would be able to cope with the Japanese disaster, but they were also investing directly into Japanese firms whose customers and production are predominantly outside Japan, and where share prices had fallen more than was justified.

According to Arthur van Slooten, macro strategist at Societe Generale: “The major shift in focus is the renewed buying interest of Japanese equities, following the reaction to the unfortunate events.”

Paul Marson, chief investment officer of Lombard Odier Private Bank, said “The Japanese equity market would appear to be extremely cheap by historical standards in a particularly loose monetary environment.”

According to Ed Rogers, manager of New York based Wolver Hill Asset Management, an alternatives manager with a Japanese fund of funds, a number of opportunities have arisen in Japan after the earthquake. In a letter obtained by Dow Jones Newswires last Friday, Rogers said almost all of Wolver Hill’s managers have “improved on their performance for the month since the very difficult trading sessions of Monday and Tuesday, when the Japanese indices were plummeting”.

Japanese hedge funds are currently up 2.94% in March, according to Bank of America Merrill Lynch. Investors are also allocating to traditional Japanese funds. Magnus Spence, partner at Dalton Strategic Partnership, a UK manager with a number of Japan focused investment funds, said DSP funds experienced inflows on March 15, when the Nikkei 225 fell 11% to 8,605.

Hedge funds have also piled into Yen futures, due to the belief that the repatriation of funds by Japanese insurers in order to finance claims will lead to a strengthening Yen. According to data from Bank of America Merrill Lynch’s Hedge Fund Monitor, “large speculators” had a long position $5.3bn of Japanese currency from March 21 to March 25.

• Separately, according to a report by Bank of America Merrill Lynch, hedge funds are selling American equities and buying US bonds. The US bank said hedge funds added to their short positions in the Nasdaq 100 and the S&P 500. The managers also bought 2-year and 10-year US Treasurys.

Ken Gundle, founder at fund of hedge funds firm Aurum Funds, said: “Last week there were whispers of downgrades in Spain and Portugal – that has now happened. There’s a sense that people are wanting to get out of the way. They don’t want to be in cash, hence the move into Treasurys.”