Asia Pacific Intelligence

FCA seeds Japanese -focused hedge fund

Thursday, February 07, 2013

Patric de Gentile Williams

Continuing with the new focus on hedge funds in Japan, news came at the end of January that FRM Capital Advisors (FCA), the seeding division of FRM, Man Group plc's fund of hedge fund division, had invested in Arena Capital Management, a Japan focused hedge fund, run by ex-Citadel and Highbridge manager, Toby Bartlett.

In an interview with Asia Pacific Intelligence, Patric de Gentile Williams, head of seeding at FRM explained that they had been open minded generally about strategies in which they would next make an investment, but that Japan had recently increasingly come to the forefront of their investment thoughts.

"There has been a sense over the last few years that globally investors were reducing their exposure to Japanese long short as liquidity eroded over the last couple of decades and the market was reasonably moribund" de Gentile Williams says.

"But we did notice some investors starting to ask questions about it maybe a year ago so that exodus was coming to an end." Three factors portentously collided to push FCA into its investment with Arena.

"One, there is a fantastic opportunity at Arena, secondly there was some sense that this outflow was coming to its end and a few people were tempted to look into the space, and thirdly was the fact that the yen has fallen, then the Nikkei was up so the turnover in the equity market has suddenly gone up which has drawn people's attention to that space. We were most of the way towards making our decision to invest in Arena before the market turned, but it didn't hurt."

Arena's Bartlett is a Japanese speaking Australian, who spent three years living in Japan and worked for Fidelity, then Citadel and then Highbridge. "We liked a number of things about him" de Gentile Williams says. "He is a charismatic, enthusiastic, driven character and quite compelling as an individual. He has also been focusing on the same sector, of Japanese domestic securities, for 10 years now so he has good relationships in that sector. In an area where most have been withdrawing resources, he has 350 to 400 stocks that he knows very well. That set of relationships and long experience give him a good backdrop against which to run money. He has developed a distinctive style and strong skill set in the way he trades and portfolio construction which allows him to get clear expressions of the ideas he wants while neutralising risks."

Arena launched mid-2012 and launched the Japanese long short equity strategy fund in September. De Gentile Williams describes the fund as market neutral with pure alpha returns. FCA is starting its investment with $25m and is the first institutional investor into the fund. "For us it's a relatively small investment which is not a reflection of any lack of conviction on our part more that it's a niche opportunity. At the moment total capacity is probably around $500m." This may increase as the Japanese stockmarket liquidity improves.

Since September, the fund has seen a small positive return of just over 2% but according to the pro forma track record Bartlett has consistently achieved high single digit returns with a Sharpe ratio of over one.

For FCA, this deal is the first of three with another one coming out in each of the next two quarters.

This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.