Two years ago we wrote in this publication about our conviction in Japanese hedge funds, due to their track record of generating consistent alpha and managing risk during down periods in the markets. Similarly, we explained how these managers had, over the course of almost two decades, acquired a unique set of skills which had helped them to navigate through tough market conditions and deliver attractive long-term risk adjusted returns. We discussed how the size and depth of the Japanese stock markets, coupled with low research coverage compared to other developed markets, provide the right investment framework for home-grown hedge fund managers to develop an edge over foreign institutional allocators as well as local retail investors, and how these managers were able to uncover mispricing opportunities.
We also looked into how a range of idiosyncratic factors such as cultural differences and the language barrier have made it harder for foreign investors to participate in the market, and have allowed local managers to be alpha generators. Our conclusion at the time was that while the changed macro outlook for Japan had triggered increased flows from global long only allocators, investors should challenge the prevailing wisdom that the main reason for betting on Japanese equities was the turnaround of a protracted Japanese bear market, and instead focus on the alpha generation opportunities available in this unique market based on identifying investment ideas generated and executed by the most experienced local managers.