Review of Japanese Hedge Funds in 2024 and Forecast for 2025
In 2024, Japanese hedge funds delivered impressive returns, outperforming the TOPIX index by a significant margin. This strong performance can be attributed to several key factors, including corporate governance reforms, the end of deflation, and a shift in monetary policy, among others.
Japanese equities have benefited from a wave of deep-rooted corporate governance reforms, making companies more attractive to global investors. Improved management practices have unlocked hidden shareholder value and led to better financial outcomes. Hedge funds, in particular, were quick to capitalise on this trend.
The end of Japan’s long-standing negative interest rate policy in March 2024 marked a symbolic end to the country’s decades-long deflationary environment. This shift in monetary policy encouraged both domestic and international investors to re-enter or increase their allocations to Japanese equities, sparking renewed interest in hedge funds targeting Japan.
Historically, there has been a dearth of Japan-dedicated funds with strong track records and capacity to handle large institutional investments. However, in 2024, this changed as global allocators sought to increase their exposure to Japan, flooding hedge funds specialising in Japanese assets with capital.
The Japanese mutual fund market is projected to surpass $1 trillion in total assets in 2024, driven by both institutional and retail investors reallocating into equity funds, especially through tax-advantaged NISA accounts. Additionally, there is a broader trend of institutions shifting towards passives and private assets, but hedge funds have benefited from the overall expansion and increased liquidity in the Japanese market.
Japan’s macroeconomic environment remains stable, with a large, liquid domestic investor base and a high level of net external assets. This stability anchors long-term confidence in Japanese government bonds and reduces the risk of sharp yield spikes or market selloffs, providing a supportive environment for hedge funds to operate.
The Eurekahedge Japan Long Short Index ended August down -0.88%, while the TOPIX lost -2.92%. In August 2024, the TOPIX index lost -5.8%, while most Japanese hedge funds lost a mere fraction of this, with some being positive.
Manager selection remained key in 2024, with top performing strategies including flexible net managers and quantamental funds. The expectation is that non-equity strategies will start to become interesting diversifiers and alpha opportunities in previously unexploited niches of the Japanese markets.
In conclusion, the confluence of governance improvements, macroeconomic stability, and pent-up demand for Japanese exposure propelled Japanese hedge funds to strong performance in 2024. Large global platforms continued to recruit portfolio managers to trade Japanese equity markets in 2024, diversifying the toolset available to allocators and allowing for the construction of even more robust portfolios of Japanese hedge fund alpha.
The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group.
References: [1] Sussex Partners (2024). "Japanese Hedge Funds: A Superior Risk-Adjusted Approach to Investing in Japan." [2] Eurekahedge (2024). "Eurekahedge Japan Hedge Fund Index: August 2024 Performance Review." [3] OQ Funds Management (2024). "Record Growth for OQ Funds' Japan-focused Hedge Fund." [4] Bank of Japan (2024). "Monetary Policy Report: April 2024." [5] Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. (2024). "Japan Mutual Fund Market Outlook 2024-2025."
Actively managed hedge funds, with a focus on Japanese equities, thrived in 2024 by capitalizing on corporate governance reforms and improved management practices, leading to better financial outcomes for investors. The shift in Japan's monetary policy and the end of the deflationary environment also incentivized both domestic and international investors to increase their allocation to Japanese hedge funds.
