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Does Location Matter?
Shashi Agarwala, Eurekahedge
July 2005

We thought it would be interesting to compare the returns of the hedge funds in our database based on their locations. In this analysis, we examined a sample of Japanese long/short equity funds.

Analysing the returns data since 1998 shows that Japan-based long/short equity funds have been generating almost 50% more returns than its counterparts in the United States, Hong Kong, Singapore and Australia. The returns however are slightly over 3 times higher than the Japanese long/short equity funds based in the UK.

Despite that the annualised returns for Japan-based Japanese funds are slightly skewed due to the exceptional performance by a few funds (located in Japan) in the survey, it is interesting to note that UK-based Japanese funds clearly lagged behind their US and Asian counterparts.

Head Office Location
# Funds in Survey
Jan 05 to May 05 (%) 2004 returns (%) 2003 returns (%) Annualised Return (%) 1 Annualised Standard Deviation (%) 1 Average Total
Japan 5.57 8.85 7.16 18.29 7.81 185 4434 24
Asia ex Japan 2.03 5.28 26.39 11.52 12.27 263 2628 10
United Kingdom 1.59 3.87 9.09 5.87 8.22 446 12943 29
United States 4.13 10.04 13.25 11.22 8.33 321 5131 16
1The annualised returns and standard deviation are calculated since their respective dates of inception

So how did Japan-based Japanese funds pull off such stellar performance in comparison to the non-Japan located funds?

Traditionally, Japanese long/short strategies have favoured investing long mid/small caps and short large caps due to the lack of available research in the former and often overvalued prices due to overzealous retail investors in the latter.

Being located outside of Japan means that it is harder for UK- and US-based Japanese funds to obtain quality research on mid/small caps due to distance, different time zones and language barriers.

Interestingly, US-based Japanese funds have fared better than their UK peers. We suspect this is because more US-based funds are run by Japanese managers who spend more time travelling to Tokyo and/or have Tokyo-based research offices.

Japanese assets relative to the risk adjusted ratio

Another interesting analysis of the Japanese assets based in Japan and elsewhere gives a sense of where the money is currently compared to where most of the returns are. Clearly, the size of Japan-based assets compares low with that of UK and the US. This perhaps explains why being close to the source of capital matters, as the majority of investors in Asian funds are based in London and New York.

However, comparing the average assets in all of these markets relative to the risk adjusted ratio indicates that there is a lot of potential in Japan-based assets. This could possibly mean a flight of UK-based Japanese assets into Japan-based or US-based Japanese assets in the coming few years where investors can hope for better returns. The downside, of course, could be more pavement pounding!

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