Fri, Jul 28, 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. Launches - Bitcoin hedge fund launches ethereum-subscribed ICO investment vehicle, Jersey players institutionalize first regulated crypto-currency hedge fund[more]

    Bitcoin hedge fund launches ethereum-subscribed ICO investment vehicle From Coindesk.com: The operators of a regulated, Jersey-based bitcoin hedge fund have officially closed a new $5 million fund aimed at investing in cryptocurrency tokens and initial coin offerings (ICOs). Backed by fun

  2. SWFs - China Wealth fund backs TPG lender as part of U.S. property push[more]

    From Bloomberg.com: China Investment Corp., the sovereign wealth fund that controls $814 billion in assets, is betting on U.S. real estate by investing in a commercial real estate lender formed by the money management firm TPG. In conjunction with last week's initial public offering of TPG RE Financ

  3. Months to minutes: Enigma launch aims to boost crypto hedge fund creation[more]

    From Coindesk.com: What if starting a hedge fund was as easy as downloading an API? A startup incubated at MIT Media Lab is today revealing a product designed with this ease-of-use in mind. Called Catalyst, the first product offering by blockchain startup Enigma aims to trigger nothing short of an e

  4. North America - Hedge funds disclose their Puerto Rico debt holdings, US dominates new money portion of Greece's debt sale[more]

    Hedge funds disclose their Puerto Rico debt holdings From Reuters.com: A group of hedge funds that hold about $3 billion of Puerto Rico sales-tax-backed debt released a court filing late on Tuesday that revealed how much of the total amount each fund manages. Decagon Holdings LLC,

  5. $25 million cryptocurrency fund launches to capitalize on the "internet of the future"[more]

    From Coindesk.com: General Crypto, a $25 million cryptocurrency hedge fund, has launched to provide high net worth investors with liquid exposure to the cryptocurrency market and digital assets that they believe could run the technological infrastructure of the future. Since the start of 2017, the t