Thu, Oct 19, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Asia Pacific Intelligence

Kretschmer reports from the front line of Japanese long/short investing

Thursday, June 13, 2013

Michael Kretschmer manages the Pelargos Japan Alpha Fund, a long/short relative value fund investing in Japanese equities. He was interviewed in April by Asia Pacific Intelligence but events since that interview warranted a return visit to see how his fund has fared through the recent volatility experienced in Japanese equities.

Kretschmer says: "The rally in the Japanese equities of the multi-decade low was extremely powerful and to some extent astonishing , not so much in the timing but certainly in the magnitude of the move. We had eight consecutive up months driven by heavy retail participation and foreign buying in the futures market." He doesn't feel that the 80% parabolic ascent was sustainable, "parabolics are never sustainable, and it was followed by a vicious sell-off to shake out the weak hands" he says. "I was surprised that the major indices actually reached such high levels and then again it was not a surprise that once buyers were depleted, the market crashed hard, especially the Japanese market which has a tendency to over- and undershoot."

Kretschmer finds it peculiar that investors tried to search for reasons why this sell-off occurred and that coinciding events, such as a poor Chinese PMI number, was chosen as causality. Kretschmer says: "Retail participation reached multi-year highs and with that margin debt, once the market direction turned the sell-off was reinforced by margin calls. Plus, to me it seems that a lot of ‘marginal' strategies were squeezed out."

Kretschmer explains that with very low interest rates of close to zero and the ability to use high leverage makes even low investment returns strategies profitable. "Once interest rates increased, many highly levered strategies are not profitable anymore, especially arbitrage strategies were impacted."

Kretschmer thinks that this sell-off is very healthy. "It shakes out the macro tourists and headline/event driven retail investor and once the dust settles the market will refocus on fundamental trends" he says. "Longer term the behaviour of the JGB market will be crucial to equity investors. Contrary to average opinion, I think higher interest rates are a good thing for an economy, it makes capital scarce and leads to more efficient capital allocation. However, a highly indebted system such as the Japanese needs a slow transition towards a higher interest rate environment. Anyway, interest rates below 1% are too low, but the holders of JGBs are risk averse and the current volatility is unwarranted for them. The BOJ finds itself in a paradox, it promised higher inflation, therefore it is rational to sell JGBs but at the same time the BOJ buys JGBs to lower the risk premium."

Kretschmer's fund lost 1% over May but is still up 18% for the year  with limited volatility. "The whole buying frenzy prior to the crash was momentum driven and valuation was neglected, I think that once volatility has peaked good old fashioned value strategies will contribute positively again."

Looking forward, Kretschmer describes his base case scenario as that the initial crash will be followed by a period of volatile sideways trading and another move lower. "Bull markets are supposed to climb a wall of worry and a lot of froth needs to be unwound before the structural bull can continue. It's interesting to note, the ‘generals' of the bull move were the reflation trades such as REITS, real estate and banks. Once those sectors stabilize and start to outperform again is on a much healthier footing" he says.

 
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.
Asia Pacific Intelligence
Asia Pacific Intelligence
Asia Pacific Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Regulatory - David Stockman: Trump tax reform overhaul is a pipe dream, stocks are heading for 40-70% plunge, Carried interest tax: How much does it matter?, Odey sees 'terrifying' mix in MiFID, tapering, asset values, Hedge funds come together to share cost of MiFID and research, SEC turns up the heat on U.S. investment advisers, India's Sebi asks hedge funds to report investments in commodity derivatives[more]

    David Stockman: Trump tax reform overhaul is a pipe dream, stocks are heading for 40-70% plunge From CNBC.com: David Stockman is warning about the Trump administration's tax overhaul plan, Federal Reserve policy, saying they could play into a severe stock market sell-off. Stockman, the R

  2. North America - Puerto Rico rejects loan offers, accusing hedge funds of trying to profit off hurricanes[more]

    From TheIintercept.com: Puerto Rico has rejected a bondholder group's offer to issue the territory additional debt as a response to the devastation of Hurricane Maria. Officials with Puerto Rico's Fiscal Agency and Financial Advisory Authority said the offer was "not viable" and would harm the islan

  3. Investing - WPP targeted by short-selling American hedge fund, Sun co-founder sells secretive hedge fund on big chip trade[more]

    WPP targeted by short-selling American hedge fund From Cityam.com: An American hedge fund has mounted a bet against WPP, the world's largest advertising group, with a trade worth almost £90m. Lone Pine Capital has built a short position worth 0.51 per cent of the FTSE 100 company,

  4. Hedge funds up as industry adjusts to rising rates[more]

    Komfie Manalo, Opalesque Asia: Hedge funds have reshuffled their portfolio after nearly four weeks of rising rates as the Lyxor Hedge Fund Index was up +0.2% from 19 September to 26 (+1.1% YTD), fuelled by strong results of global macro funds, Lyxor Ass

  5. Manager Profile - How the world's hedge fund king used 'idea meritocracy' to become a billionaire[more]

    From Forbes.com: In 1982, Ray Dalio made what he calls the biggest mistake of his life. He made a bet that there would be an economic collapse stemming from a debt crisis. And he was wrong. He lost money. He lost his client's money. He had to let people go from his firm and borrow money from his dad