Mon, Jan 26, 2015
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. Commodities - Druckenmiller alums at PointState make $1 billion on oil, Andurand Capital sees oil sliding to $40[more]

    Druckenmiller alums at PointState make $1 billion on oil From Bloomberg.com: Hedge fund manager Zach Schreiber stood on stage at Avery Fisher Hall in New York eight months ago and made a bold prediction. “We believe crude oil is going lower -- much lower,” Schreiber, 42, told the audienc

  2. Investing - David Einhorn discloses a new position in Time Warner, Canyon trimming bets on mortgage bonds after making $7bn[more]

    David Einhorn discloses a new position in Time Warner From FTLeavenworthlamp.com: …Einhorn also disclosed a new position in Time Warner. "Since 2009, TWX has refocused its business into a collection of high quality assets including basic cable networks (Turner and CNN), a movie studio (

  3. Top performing private equity firms you should invest in[more]

    Komfie Manalo, Opalesque Asia: Professor Oliver Gottschalg of Paris-based HEC Business School, also known as Ecole des Hautes Etudes Commerciales de Paris has released his annual ranking of the top performing private equity firms. The 2014 HEC-DowJones Private Equity Performance Ranking

  4. Comment - Why invest in hedge funds if they don't outperform the market?[more]

    From Forbes.com: Hedge funds have always been a bit exotic and an enigma to some, but bottom line they are supposed to produce good returns using a range of strategies including global macro, event driven and relative value (arbitrage). And, sophisticated or high-net-worth individuals (HNWIs) could

  5. Owen Li 'truly sorry' for blowing up $100m of hedge fund’s assets[more]

    From CNBC.com: A hedge fund manager told clients he is "truly sorry" for losing virtually all their money. Owen Li, the founder of Canarsie Capital in New York, said Tuesday he had lost all but $200,000 of the firm's capital—down from the roughly $100 million it ran as of late March. "I take r