After decades of lackluster and even declining performance, Japanese equities are seeing renewed interest from hedge funds across the world. As the Bank of Japan enters a new era of loose money policy, mostly implemented through quantitative easing similar to that being undertaken in the US, a declining Yen has the largely export-focused Japanese economy set for breakout growth. This has drawn the attention of hedge funds looking for opportunity to squeak out some incremental earnings for their portfolios in a very difficult global market.
After posting year-over-year declines in both 2010 and 2012, the benchmark Nikkei 225 Japanese equity index has a remarkable 2012 posting returns of nearly 23 percent. This has been followed by an explosive start to 2013, where returns have now exceeded 32 percent. Most of the growth has come from the optimism surrounding Japanese exporters who stand to benefit from the weakened Yen, which has fallen over 11 percent against the dollar in the first four months of the year.
Japanese Focused Funds Posting Strong Returns
Many hedge funds that focus on Japanese equities have dramatically outperformed their US, European or Asia (excl. Japan) peers. Sloan Robinson, a London-based fund, has posted a 44.6 percent return in its Japanese fund this year, while the Blue Sky Japan fund recorded a very impressive 36 percent gain. These two leaders are joined by the Martin Currie Japan fund which returned 19 percent so far this year, which also betters both the S&P 500 and the MSCI Europe Indices.
Even those outside of Japanese equities have been able to benefit from the new monetary policy adopted by the Bank of Japan. Currency focused funds have been able to profit immensely when shorting the Yen through the first third of 2013. Macro funds, who take positions in currencies in order to bet on their perceived outlooks for regional economies, are some of the biggest winners. Despite on average only earning 7 percent in the four years prior to 2013, macro funds such as Jones’ Tudor Investment Corporation and Caxton Associates have bettered that benchmark in the first four months of this year alone.
Economies with Aggressive Monetary Policy Become Attractive Investment Targets
As the global economy continues to sputter several years after the financial crisis, investors are actively seeking leadership from those at the reins of monetary policy in potential target investment countries. The strong performance coming out of Japan stands in stark contrast to Europe, where a disjointed and piecemeal approach to monetary and fiscal policy has left investors uncertain about the future. More so, quantitative easing has played a large part in the recovery in the United States, where the Dow Jones recorded an all-time high just last week briefly crossing the 15,000 level.
In an era where currency risk can be easily hedged away, funds currently have the leeway to take advantage of the positive impacts of loose monetary policy on equities. Funds that take advantage of these opportunities will almost certainly be leading the pack until a global recovery takes hold and the repercussions of these aggressive central bank decisions become known, for better or worse.