At the top of the hedge fund performance tables for Japan in 2010 is a relatively new arrival. The Instinct Japan Opportunity Fund launched in Sydney in December 2009 and was up 33% for the year, with volatility of 12% to 13%.
Instinct Capital started out with $10 million and now runs $100 million. Last year AsianInvestor reported that it was likely only the bigger, $1 billion-plus Japanese hedge funds that largely scooped the limited pot of capital that came available in 2010.
The fund's principals – investment manager Fred Eechaute (pronounced 'e-kot'), who hails from Normandy in France, and Australia-born Stephen Good, the firm's business manager – don’t agree with that theory, based on their positive experience.
“Our capital grew thanks to investors with early-stage expertise [but not seeders]," says Good. "They included funds of hedge funds, some high-net-worth family offices and European and Asian family offices. At this point, more institutions are gravitating towards us. Our third biggest investor is a pension fund, and Japanese pension funds are showing interest.”
That final point about Japanese pension funds is an interesting development, in the context of ongoing Japanese institutional interest in alternatives.
Instinct hopes to hit $150 million by March 2011 and $200 million in the summer, which will be a soft closure point.
Eechaute and Good worked together at Mizuho Securities in Japan and were recently joined by another old Mizuho colleague, Hiroaki Kamoshida, now Instinct's man on the ground in Japan. (The firm opened a research office in Tokyo in November 2009.)
Eechaute plans to move to Japan later this year, and they are thinking about applying for full FSA-regulated investment advisory status for the office at some point.
The hedge fund operates a variation on an orthodox event-driven strategy, which de-emphasises merger arbitrage (which is just as well, given the amount of activity in that discipline in Japan last year). Instead, the fund looks at potential catalysts such as new product launches, outlooks based on insights gained from on-site visits and month-end figures.
Instinct has an average holding period of just five days and is trading-orientated, undertaking an average of 70 to 100 trades a day. Their average profit on a winning trade is 2% and average loss on a duff one is 1%.
Performance was at its best from January to April, when Instinct raked in 20%, the summer was basically flat, and then the rest of the performance was recorded from September onwards.
Why the lull in the summer? That was the time of greatest concern over the European sovereign debt crisis, which was accompanied by a strengthening yen.
“We have a bottom-up speciality, so a macro mindset is a headwind for us,” says Good. “That's because people are less excited about a 3–5% upside from a new product launch when they feel worried about more general survivability issues.”