Hong Kong-based Sengu Capital Ltd. is set to launch a new hedge fund that aims to capitalize on Japan’s financial market resurgence. The fund will begin trading in early October, as announced by Chief Investment Officer Yoshihiko Ohira and Chief Operating Officer Xavier Fanjaud.
Strategic Backing from HS Group
Sengu Capital has secured long-term support from HS Group (Hong Kong) Ltd., a firm known for providing strategic capital to emerging managers. In exchange, HS Group will receive a portion of the fund’s fee revenue.
Growing Interest in Japan
Investors are increasingly interested in Japan as the country emerges from over a decade of deflation. This interest comes amid China’s economic slowdown. Despite this growing interest, the number of hedge funds focused on Japan has remained relatively stagnant, according to Preqin Ltd. estimates as of mid-July.
Improvements in Corporate Governance
Japanese companies have historically been criticized for opaque succession planning, often promoting from within based on seniority or familial connections. However, recent trends show a shift towards better corporate governance. More companies are now using nomination committees and adopting practices similar to Western standards. By 2022, over 80% of “prime market” listed companies had established nomination and remuneration committees, as reported by Japan’s Financial Services Agency in June 2023.
Investment Strategy
Sengu Capital will focus on approximately 400 Japanese companies with medium to large market values and high liquidity. The fund plans to maintain positions in about 50 stocks, balancing long and short bets. The long positions will target companies with improving management quality, which is expected to enhance efficiency and profit margins. Conversely, short positions will be taken against companies showing deteriorating fundamentals due to poor management or changing industry conditions.
Expert Insights
Michael Garrow, CIO of HS Group, highlighted the importance of assessing corporate strategies in Japan amidst ongoing governance reforms and generational shifts in corporate leadership. The resurgence of inflation in Japan presents varied impacts across different sectors, creating opportunities for hedge funds to profit from rising and falling stocks, according to Fanjaud. The fund aims for a net exposure of 20% to 30%, reflecting the difference between the value of long and short positions.
Distinctive Approach
Sengu Capital’s strategy is notable because most Japanese hedge funds are dominated by activists with long-term approaches or traders who are highly diversified and market-neutral. This fund’s approach is distinct for its focus on both bullish and bearish bets in a targeted manner.
Experienced Team
Ohira, previously a Japan analyst at Turiya Advisors Asia Ltd. and Pleiad Investment Advisors Ltd., brings extensive experience to Sengu Capital. He left Pleiad in 2019 to serve as CIO at Hong Kong’s Luxence Capital Ltd., where he led a fund focused on Japan and China. The Japan investments of Luxence yielded double-digit annualized returns over 4.5 years, a performance Sengu Capital aims to replicate over a three- to five-year period.
Joining Ohira at Sengu are COO Xavier Fanjaud and Takayuki Natsume, a senior analyst with 32 years of experience in the investment industry.
Conclusion
Sengu Capital’s new hedge fund represents a strategic bet on Japan’s market revival, driven by improvements in corporate governance and evolving economic conditions. With strong backing and a skilled team, the fund aims to navigate Japan’s financial landscape and deliver substantial returns to its investors.
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