A lack of enthusiasm for Japan-focused hedge funds has been reflected in poor inflows this year, according to new data.

The marginal inflows belie Japanese stock prices, which have been surging on the back of government quantitative easing.

Foreign investors have instead been focused on long-only funds rather than hedge funds, alongside a greater enthusiasm for pan-Asia mandates.

Mohammad Hassan, analyst at data provider Eurekahedge, said that there had been only marginal inflows into Japan-focused hedge funds in recent months. January saw $250 million of outflows, which was followed by $25 million of year-to-date net inflows, said Hassan.

The poor flows have been reflected in hedge fund performance. Eurekahedge’s Japan hedge fund index rose 5.19% in the first five months of this year, well below the 13.6% rise in the Topix over the same period.

Hassan said that foreign interest in Japan has been focused on long-only funds rather than hedge funds.

Mark Hibbs, CIO at Adamas Asset Management, observed that 40% of the companies in the broad-based Topix index are still trading below book value, leaving little room for investors to bet on declining share prices.

Respondents to a survey conducted by Eurekahedge (on behalf of AIMA Japan), released last week, were bullish about the market’s prospects. A total of 92% of respondents saw Abenomics as successful, either in 2013 and/or 2014 while 65% were either fairly or very optimistic about prospects for Japan’s economic performance.

Investors are also taking corporate governance more seriously. A fund manager's corporate governance practices was second only to risk-adjusted returns when it came to factors impacting investment in a fund. That marked a rise from last year's survey.

More broadly, expectations for Japan's corporate governance revolution have moderated since a new corporate governance code came into force on June 1.

The focus has shifted to the country’s upcoming season of AGMs in the last week of June. Hibbs expects to see “push back” from investors looking to see more progress on implementation of the corporate governance code.

The new governance code encourages companies to appoint two external directors to their boards and adopt return on equity (ROE) targets.

Equity stake sales in unrelated companies are one way for companies to boost ROE, which has attracted the attention of hedge fund managers.

More than half of the 13 hedge fund managers who made presentations at a recent hedge fund conference in Hong Kong put forward stocks listed on Tokyo’s stock exchange as investment ideas.

“I think an unwind is imminent,” said Balyasny Asset Management’s Asia head Avinash Abraham. He was referring to the prospect of Suzuki Motor selling its stake in German carmaker Volkswagen and vice versa.

Aaron Nieman – Hutchin Hill Capital’s head of pan-Asian equity – argued the case for Japanese broadcasters. Neiman sees the sector as one of the best examples of cross-shareholdings between companies in Japan.

“In the past, I would never consider investing in something like this,” said Nieman, referring to the “spaghetti bowl” of shareholding relationships between companies.

Government pressure for companies to unwind cross-shareholdings has encouraged Nieman to change his view.

Few respondents to the Eurekahedge/AIMA Japan survey saw reform or deregulation as a key support for Japanese equity market valuations this year, however. The most important factor supporting valuations was seen as increased domestic consumer spending (selected by 34% of respondents), rising overseas allocations to the market (30%) and a weaker yen boosting corporate profits (23%).

Higher consumer spending ties in with wage growth, noted Hassan. Labour market reform (38%) and wage growth (31%) were the two most important factors driving Japan’s economy, according to the Eurekahedge/AIMA Japan survey, followed by increased QE (16%), postponement of consumption tax (12%) and lower oil prices (3%).

Hibbs sees “little sign that people are splashing out on consumption”. After a period of wage declines, increases are now “barely keeping pace with cost rises,” he said.

He did, however, point to stronger results from high-end department stores such as Mitsukoshi, driven by an influx of Chinese tourists.

Investors capitalising on that theme was highlighted by Tybourne Capital Management’s founder and managing partner, Eashwar Krishnan, at the recent Sohn Conference in Hong Kong. He argued the case for investing in airport operator Japan Airport Terminal as well as Shanghai Pudong International Airport.