US hedge fund Verdad plans to launch new Japan small-cap fund
A gauge of smaller stocks has outperformed the broader Topix this year with a gain of 19%, compared to 14% for the index
[TOKYO] Boston-based hedge fund Verdad Advisers is planning to launch a new Japanese equity fund focusing on small-cap companies, another sign that global investors are looking beyond blue chips to unlock extra returns from the nation’s reawakened stock market.
The fund, which may launch as early as this year, will continue the strategy of the investment company’s existing two micro-cap funds by looking for capital inefficiencies such as debt-heavy or cash-heavy balance sheets, Verdad founder Daniel Rasmussen said on Sep 17. The new fund will target larger market caps of more than US$400 million, he said.
“If you go down into the thousands of small stocks, you can find these much more extreme profiles, much more extreme opportunities,” Rasmussen said. “Once you go up into large cap, the market is very efficient. It’s hard to make big profits.”
Hedge funds with exposure to Japan have fallen back into favour amid a campaign by the Tokyo Stock Exchange (TSE) to improve profitability and shareholder value for listed companies. Some have turned to smaller stocks where improvements in capital efficiency have lagged and valuations are low. Activist investor Asset Value Investors said earlier this month it plans to add stakes in small- and mid-cap companies.
Japan small caps have been on a tear. A gauge of smaller stocks has outperformed the broader Topix this year with a gain of 19 per cent, compared to 14 per cent for the index. The MSCI Japan Small Value index has risen more than 30 per cent.
Take Verdad’s two existing funds, which have returned 39 per cent this year to the end of August. The performance has pushed their combined assets under management to US$300 million, roughly a quarter of Verdad’s total, according to Rasmussen. For the new fund, he’s aiming at more than US$1 billion in assets over the next few years.
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As part of its expansion plans, Verdad plans to hire one to two Japanese analysts specialising in both quantitative and fundamental analysis, Rasmussen said. Family offices and institutional investors across Europe and the US are Verdad’s client base, he said.
Even so, roadblocks to the small-cap strategy are many. Limited liquidity restricts the size of holdings an investor can build, while smaller-sized companies have less English-language disclosure. A survey by the TSE backs this up, showing only 37 per cent of companies with less than 25 billion yen (S$217 million) release English statements as at December 2024, compared with 63 per cent of companies with market caps of 100 billion yen or more.
While Rasmussen says he sometimes needs to further explain the Western concept of capital efficiency to management, diversifying portfolios across 50-100 stocks gives him leeway for patience.
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“Companies that you never thought would make changes are starting to become more and more shareholder friendly,” he said. BLOOMBERG
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