3/27/2024
Why Good News for Japan May be Bad News for Hedge Funds
Financial Times (03/27/24) Lewis, Leo
After three decades of corporate stagnation, there is fresh momentum in Japan — but
not everyone is pleased. The problem, if it can be called that, is that Japan’s equity market is in excellent shape. Arguably, in terms of trajectory and narrative, the best shape it has ever been. Some weeks ago, the Nikkei 225 Average surpassed its December 1989 peak. It has gained nearly 22% since the start of the year and the Topix index — the broad benchmark of corporate Japan — has closed to within inches of its all-time high. In a whirl of share buybacks, new merger and acquisitions rules, successful activism, and top-down pressure to improve returns, companies, the government and the stock exchange itself have done enough to convince the world that this time is different. There are always plausible ways it could unravel but the story of positive change is holding. However, the reliability of Japan’s old “nothing to see here” market offered specific opportunities to certain hedge funds. Rapid, predictable mean reversion is very useful if you are running a long-short strategy and your risk managers are obsessed with maintaining neutrality in all things. For a certain type of hedge fund — a breed now dominated by the huge multi-manager platforms such as Citadel, Millennium, Polymer, and others — neutrality reigns supreme and Japan, accordingly, has been very appealing. Generations of market participants learned to sell their winners and buy the underperformers, said one manager whose hedge fund is now in urgent search of a new strategy. Everything worked beautifully until about 18 months ago when the Japanese market became, in effect, momentum-driven. With the whole market rising at the same time, market neutrality has been far harder to maintain. Some funds continue to thrive but many of the multi-manager platforms, according to dozens of brokers and asset allocators, have found the rally to be the hardest environment they have operated in for many years. Shareholder activism is moving stock prices, and, critically, the fear of activism is pushing Japanese companies to pre-emptively reward shareholders with non-core asset sales and share buybacks. Big, long-only money is coming into the Japanese market chasing high-quality companies with improving governance standards, exposure to global growth, and a “not China” story. Significantly, momentum-chasing global investors who previously sought their fix in China are turning to Japan, say brokers, and bringing the momentum with them. The new money coming in, explains one manager, has a growth mindset that prefers to add to its winners and buy more on good news — the antithesis of the zero-sum mindset of many of the long-short platforms that have dominated trading in Japan equities for so long.
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