Analysis of Japanese Hedge Funds in 2024 and Prospective View for 2025
In the financial landscape of 2024, Japanese hedge funds demonstrated remarkable resilience and outperformance compared to long-only returns, particularly against the TOPIX index. This resurgence can be attributed to several factors linked to Japan's evolving market environment and investor sentiment.
Despite a dispersion between managers and strategies, some managers generated returns in the twenties and thirties, outperforming the TOPIX index by a significant margin. Japanese hedge funds delivered a return of 10% in 2024, while the TOPIX index returned 17.7%. Even in August, when the TOPIX index lost -5.8%, most hedge funds in the Japanese market lost a mere fraction of this.
The deepening corporate governance reforms and Japan's exit from more than a decade of deflation have rekindled global investor interest. This structural improvement supports hedge funds that can actively capitalise on corporate improvements rather than passive equity investing.
The Bank of Japan ended its negative interest rate policy in March 2024 and subsequently raised the policy rate to +0.5% by January 2025, signalling an end to the long-standing deflationary environment in Japan. This shift likely enhanced market dynamics and volatility, which hedge funds can exploit through their flexible trading strategies, unlike static long-only portfolios.
Hedge funds focused on Japan experienced rapid asset growth in 2024, with firms like OQ Funds Management raising $250 million shortly after launching a Japan quantitative hedge fund, and Sengu Capital tripling assets to $450 million within months. This inflow reflects investor appetite for specialized, active strategies over traditional long-only investments.
While explicit performance figures for Japanese hedge funds versus North American hedge funds in 2024 are not detailed, Japan hedge funds' robust capital inflows and ability to navigate a changing economic regime imply competitive or superior resilience compared to many global peers. The Japan Government Pension Investment Fund (GPIF), a major long-only institutional investor, reported a modest +0.71% return in 2024, with Japan equities specifically down -1.46%, illustrating challenges for passive/long-only exposure in Japan that hedge funds could circumvent through active management and multi-strategy approaches.
The launch of several new managers in Japan occurred in 2024, indicating growing interest in Japanese hedge funds. Large global platforms continued to actively recruit portfolio managers to trade Japanese equity markets, further bolstering the sector.
In terms of risk-adjusted approach, Japanese hedge funds provided a superior performance to investing in Japan compared to the TOPIX index since the end of December 2007. Figure 3 illustrates the significant gap between the cumulative outperformance of Japanese hedge funds and their North American peers in the period from December 2007 to December 2024.
Manager selection remained key in 2024, with top performing strategies including flexible net managers and quantamental funds. With a more normalized interest rate environment, strategies other than long/short are becoming viable again in the Japanese hedge fund space. These developments diversify the toolset available to allocators and allow for the construction of even more robust portfolios of Japanese hedge fund alpha.
It is important to note that the views expressed in this article are those of the author, Patrick Ghali, Managing Partner of Sussex Partners, and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group. The Hedge Funds Guest Articles are copyrighted by The Sortino Group Ltd, and no part of this publication may be reproduced without written permission.
In conclusion, Japanese hedge funds' resilience in 2024 stemmed from their active strategies capitalising on Japan's economic reforms, the shift away from negative rates, and growing investor interest in dedicated Japan exposure, contrasting with the weaker returns seen in long-only Japan equity investments. Their rapid capital accumulation and strategic positioning suggest they held up well relative to North American hedge fund peers, benefiting from Japan's unique market conditions.
In the evolving market environment of 2024, active management strategies in finance proved advantageous for Japanese hedge funds, as they outperformed passively managed long-only investments like the TOPIX index. The shift from Japan's long-standing deflationary environment and the deepening corporate governance reforms have made active investing in business more appealing compared to passive equity investing.
