Last month we wrote in rather uninspired terms
about the revaluation of the renminbi. This month's
"news" story is much more important.
Only in Japan could the convincing re-establishment
of an almost 60-year old political dynasty be
called news! But Koizumi now has both a clear
mandate in personal terms, and a near-invincible
political toolkit, to force real change in Japan.
The world's second-largest economy's desperate
sclerosis has become almost a commonplace. We
have already seen how much of the country's needed
macro-level changes have been passed on to the
micro level (that is, how much corporate Japan
has had to restructure). Now, for the first time
in my professional lifetime, it looks like Japan
may achieve structural change, and, even more
amazingly, have a functioning democracy, empowered
to deliver a popular mandate.
Despite having lived and worked in Japan, and
speaking the language, I have rather neglected
the Japanese hedge fund industry over the last
few years. Shortly after GFIA started, in 1999
we conducted a detailed review of Japanese managers,
but in the interim have visited Tokyo only two
or three times a year, briefly, to catch up on
In August we spent a full week visiting managers
and talking to market participants. The summary
is that Japan is, in our opinion, likely to play
a very aggressive catch-up to the rest of the
Asian, and by inference the global, industry,
over the next couple of years. The drivers are
- The total size of Japanese equity markets
is US$5.7tn compared with US$10.4tn for the
rest of Asia combined. For fixed income markets,
the numbers are US$10.2tn and US$11.8tn respectively.
However there are approximately1
only 100 hedge funds focused purely on Japan
compared with 580 that include or focus on Asia.
Japan is undersupplied with hedge funds.
- Daily turnover in the equity markets is US$14bn.
Out of the 2,400 companies listed in Japan,
there are hundreds of stocks with average daily
turnover in excess of US$1m. Japanese hedge
funds are likely to have higher available capacity
than Asia ex-Japan funds.
- Japan has been in a 17-year bear market,
and therefore has not been the place of choice
to build a career for international financial
However local professionals have typically remained
engaged, and have become adept at creating some
level of return in difficult environments. We
are now seeing many local professionals transferring
their skills into hedge fund environments,
thereby expanding the pool of talent.
- There is a growing sense that Japan is
at last engaging with some of its fundamental
problems. Koizumi's stand on the Japan Post
privatisation is indicative of a genuine democratic
political process rather than the LDP's shadow-play
of the last 60 years. There is open discussion
of the problems of a shrinking population (by
2050 some commentators suggest that the Japanese
population may have halved, compared with a
doubling of that in the US). Japanese corporations
have embraced restructuring in the name of profitability.
The collapse of the cross-shareholding network
has meant that most of the Japanese stockmarket
is in the hands of economic investors looking
for returns, rather than strategic stakeholders
looking for stability3.
The highlights of the meeting programme were
- We saw a number of outstanding new propositions,
that we suspect would withstand rigorous due
diligence, and who will have meaningful capacity.
- We heard from prime brokers of very full pipelines
of new managers intending to start in the next
12 months, including a significant proportion
of large global hedge funds intending to set
The overriding theme at the investment level
is the opportunity afforded by drastic change.
Many of the more interesting strategies are clearly
designed to (or are already) take advantage of
the fundamental restructuring of Japan, at a very
- The fashionable "activist" funds
will make money, but appear to me to be mutton
dressed up as lamb. Clever, cutting edge concepts
they are not. By taking stakes in companies
and then working with the management to move
up the share price whether by broking deals,
polishing the presentation, or working with
the street to get the story out, they are playing
the oldest game in the stockmarket book. British
stockbrokers pre-big bang did it. Several maverick
funds across Asia have been doing it for years.
For entrepreneurial managers with a market presence,
an inefficient and grossly under-researched
equity market, and investors looking for turnaround
stories, this is one of those "shooting
fish in a barrel" propositions.
- Similarly we saw an interesting property fund
which proposes to "take the grubby end
of the Japanese property business and package
it for institutional investors". This is
not rocket science; it is using market presence
and entrepreneurial instincts to engineer returns.
- We revisited Tower, who I last saw in 2000
(and first saw in 1998). While the organisation
has remained exceptionally stable, in the same
office, with a headcount that has expanded over
five years from 12 to 13, the investment strategy
is radically different. The team is using its
access to capital, market contacts and entrepreneurial
skills, to involve the fund as principal in
a number of commercial ventures-including some
- One of the new managers where we would like
to do more work is focusing on stressed companies-in
other words, they are investing long and short
in listed and performing securities, but focusing
on those companies whose business model or balance
sheet is in distress.
Finally, I was struck by how livable Tokyo is.
It was always a safe, stimulating and very alive
city. Now, though, it is much more cosmopolitan,
there is infinitely more choice of consumer items,
entertainment, multiple price points for goods
and services and much more evident diversity on
the streets. While Hong Kong may have the China
story, Shanghai may have the wild west cachet,
and Sydney may serve the hippest latte, Tokyo
is much more clearly the obvious sibling to New
York and London than it was in the late 90s.
covers at least 90% of the actual universe; our
numbers are sourced from Eurekahedge and grossed
distressed investing and retail distribution specialists
3This last comment
was written before the election-but now holds
truer than when we wrote it!