Returning to Japan, hedge funds bet this time is different


* Japan one of industry's best bets in 2013

* Confidence that economy has turned corner boosts interest

* Some funds hire new staff, prepare for bigger return

By Tommy Wilkes and Nishant Kumar

LONDON/HONG KONG, Nov 15 (Reuters) - Japan, a frustrationfor the world's sharpest hedge fund minds for more than adecade, is proving one of the industry's biggest winners thisyear.

Big names from New York to London have made billions bettingthat "Abenomics" - the monetary stimulus programme launchedunder Prime Minister Shinzo Abe - would send the yen sliding andstocks surging.

And funds dedicated to Japanese markets have performedbetter than others - their percentage return on investments ismore than triple the overall hedge fund average this year,according to data from Hedge Fund Research.

Now there are tentative signs that funds are preparing for amore structural shift back into Japan, convinced that if itseconomy is finally on the road to recovery they can no longerignore the world's second-largest financial market.

"Japan has been a relatively ignored and underinvestedmarket for a long time," said Nick Linnane, a hedge fund managerat Cube Capital in London who previously worked in Japan and hasinvestments in several Japanese banks. "The consensus now is youneed to do your research."

Some funds are dusting off their old contact books torecruit stock-pickers who can grapple with Japan's complexcorporate make-up, while more Japan-dedicated funds are openingthan closing for the first time since 2007, data from industrytracker Eurekahedge shows.

This reflects the view held by a growing number of fundsthat there is money to be made in Japan beyond riding the bigmoves that have followed in the wake of the monetary stimulus.

So far, hedge fund flows into the country sparked by themonetary easing have held up despite a rocky few months as therally in the Nikkei and the slide in the yen ran out of steam.

"They believe that there is a significant tradingopportunity that will last years, not just six months. What hasbeen remarkable has been the interest from U.S. managers," saidMichele Gesualdi at Kairos Partners, which chooses hedge fundsto invest in.


According to a Eurekahedge survey, the proportion of theirmoney invested in Japan by funds who can trade globally was 9percent in September, up from 5.4 percent a year earlier.

Meanwhile, funds dedicated to Japan - who cannot dip in andout of the country - are winning back investors, albeit slowly.

After recording net outflows worth $4 billion between June2012 and May 2013, investors have added $340 million to thesefunds in the last four months, and total assets have risen to$15 billion from $14.4 billion at the start of the year,Eurekahedge data shows.

Man Group, the world's largest listed hedge fundfirm, said last month that its Japan strategy added $2.3 billionin assets between April and September.

The number of Japan-focused funds closing is falling. Threehave shut down this year - the lowest level since 2004 - against21 last year. Eighteen new funds have launched versus 19 in2012, and more are in the pipeline.

However, talk of a structural shift back into Japan by hedgefunds is greeted with scepticism by some managers.

The number of Japan-dedicated funds, whether based in Tokyoor in the larger hedge fund centres of Hong Kong and London, isa fraction of what it was 10 years ago. Between 2006 and 2012these funds made money in only two years and lost an average oftwo percent per annum, according to Hedge Fund Research.

Previous predictions that the country's economy was turninga corner have also unravelled amid stubborn deflation and weakconsumer spending, sending foreign investors towards the exit.

One of hedge funds' better-known "conviction" bets - thatthe country's high deficit and an ageing population wouldeventually trigger a sell-off in Japanese government bonds(JGBs) - has confounded traders as prices have held up.

Events like the 2011 earthquake also undermined confidence.

"Japan has been difficult for managers for so many years.The JGB trade in particular," said Fred Ingham, who invests inhedge funds at Neuberger Berman. "For many players at this stageI'm not sure this is more than a tactical move into Japan."


Still, there are signs that some funds believe this time isdifferent.

Leon Cooperman's Omega Advisors, which runs $9.3 billion inassets, is hiring a Japan specialist to analyse stocks, a sourcefamiliar with the fund said. Claren Road has relocated MartinBercetche, a portfolio manager, to Hong Kong from New York totrade across Asia, one of its investors said.

Meanwhile, Singapore-based APS Asset Management, whichmanages $3.1 billion worth of assets, is this month taking themanager of its Japan fund on a roadshow to meet investors in theUnited States and Canada for the first time, a source withdirect knowledge of the matter said.

Underpinning funds' growing confidence is a belief that Abeand central bank boss Haruhiko Kuroda will stay the course onpumping money into the economy until deflation is eradicated,and that Tokyo will finally tackle its fiscal deficit.

A healthier Japanese economy will make it easier for fundsto pick the winning and losing stocks and bonds and markthemselves out from the pack, managers believe.

"For funds that are global, for years people could looksmart by simply avoiding Japan. The reality, now that people arelooking at it again, is that you need the expertise," saidGesualdi at Kairos.

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