Japanese hedge funds are poised for better returns this year as small- and mid-cap stocks have recovered from worries over the Livedoor scandal, a media and Internet company, according to Dow Jones.

Livedoor’s founder was convicted of securities laws violations in falsifying earnings and sentenced to 2-1/2 years in prison this year. The scandal hurt hedge funds as it “made many investors nervous about smaller, new economy companies,” said Peter Douglas, a principal at GFIA, a Singapore-based hedge fund consultant.

“Japanese small- and mid-caps have already crashed in the last 18 months. Therefore for the rest of the year, Japan long-short funds should do better as further downside is much lower,” said Chua Soon Hock, managing director at Asia Genesis, a Singapore-based alternative investment firm.

Hock believes the Japanese stock market will do “very well” as the government introduces reforms, loosens rules on foreign takeovers and introduces tax incentives for fund management.

The past few years, hedge funds in Japan have done well by investing in small- and mid-cap stocks where few companies are researched thoroughly, and many companies are mispriced or undervalued. Last year, small-cap funds tanked and large-caps outperformed, but that is changing once again.

“Small-caps are cheap relative to large-caps at this point in time,” Hock said. Also, financial stocks are cheap to compared exporters.

The outlook is brightening, but investors aren’t jumping back into Japanese hedge funds in droves.

Fund managers say the Japanese market is not cheap but there is no risk of a big crash, either, having lagged other rallying markets in the region. The market is also fairly insulated from the volatile Chinese stock market. The Tokyo stock market is more dependent on China’s economic growth rather than the Shanghai stock index. 

The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.

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