(Bloomberg) -- Former Macquarie Group Ltd. quantitative hedge fund chief Nick Bird is starting a new Japan strategy, tapping renewed interest in Asia’s second-largest economy.
The strategy is expected to begin trading as early as next month with about $100 million, said Bird, who now runs his own Hong Kong-based firm OQ Funds Management. It can accommodate double the amount, with that capacity already taken up by its two investors.
Japan’s financial markets are rebounding as inflation takes hold and companies step up efforts to improve governance. Still, investors seeking to gain exposure through hedge funds have been struggling to do so without paying the hefty fees of large multi-strategy firms.
Initial backers of OQ’s new standalone Japan strategy includes a large multi-manager investment firm that already has money in its Asia hedge fund. The other is a well-known US-based institution that specializes in quantitative strategies, Bird said, declining to identify them because of confidentiality agreements.
Bird once led the Macquarie Asian Alpha Fund, a pioneer in the regional quant hedge fund industry with assets of $2 billion at its peak. He is rebuilding his career after over-expansion of assets under management and geographical coverage led to disappointing returns and the eventual closure of his Macquarie funds. Easy monetary policies globally also quashed quant returns at that time.
His own four-year-old Asia Absolute Alpha Fund returned 17.6% in the first half, more than four times the average performance of regional peers betting on rising and falling stocks tracked by Eurekahedge Pte. His approach involves screening equities with computer models, then applying human judgment to select and assign weightings to individual stocks and factors.
Starting anew in June 2020, Bird vowed to cap asset growth and avoid the over-expansion that doomed his Macquarie undertaking. The Japan strategy will boost OQ’s assets under management to more than $700 million upon its start, with total investor commitments of about $900 million, he said.
OQ’s Asia strategy already invests in Japan, and that sleeve’s returns have been particularly strong in the past two years. The decision to open a separate Japan pool came as money pledged by investors toward the Asia strategy approached the $750 million limit.
“We no longer have sufficient capacity in our Asian strategy to satisfy investor demand,” Bird said. “However, we have excess capacity in Japan, given the large number of liquid stocks with analyst coverage, the large number of stocks we can short, low borrow costs, and low transaction costs.”
Some other developments will also work in the favor of a Japan quant strategy. The Bank of Japan in March scrapped its program of buying exchange-traded funds and raised interest rates for the first time in 17 years, marking the end of massive monetary easing. By then, its ETF holdings had swelled to ¥74.5 trillion ($481 billion).
Purchases before 2021 targeted the narrower Nikkei 225 Stock Average. That meant capital flows overwhelmed company fundamentals as the main driver of stock prices, inhibiting the returns of value stocks, Bird said.
Corporate governance reforms and heightened attention to efficient use of capital also promise to close the gap between companies’ market and fundamental values sooner, he said.
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