Hedge funds are opportunists, even when the opportunity arises from a tragedy. Such was the case with hedge fund investments following the March earthquake in Japan that took thousands of lives. Immediately following the earthquake, the Bank of Japan flooded the market with yen, avoiding a liquidity crisis and keeping interest rates low. This of course created downward price pressure on the yen, and foreign exchange traders who were short yen made remarkable profits. Now, many hedge funds see ways of making money in Japan and are actively pursuing investment schemes.
Take, for example, R-Squared Master Fund. They had positions in Japanese put options and credit default swaps, both of which benefited from the turn of events. R-Squared is run by MAM Pte headquartered in Singapore. It uses strategies that rely on arbitrage and relative values, and can profit from price differences across markets. Immediately following the quake, it reported that it had no redemptions, but rather received newly allocated funds. One of their fund managers has publicly expressed interest in Japanese preferred shares and subordinated bonds, both of which were vastly oversold following the earthquake.
Nimble hedge fund traders made money both ways following the March 11 quake. Funds such as Dymon Asia Capital who were short equities at the time of the disaster benefitted from the sharp drop in the Tokyo exchange. Then, three days later, they covered their short positions, and then followed up by taking long positions in Tokyo stock index futures, benefitting from the stock market rebound. Also based in Singapore, Dymon has over a half billion dollars invested in its Asian macro fund. A trader from the firm speculates that the Japanese yen will be on a long scale downward trajectory, aided by concerted efforts of the G7 nations. He recommends a short yen/long Korean won or Chinese renminbi strategy.
Deutsche Securities (DS) held a seminar in Japan concerning alternative investments less than two weeks after the quake, and 25 Japanese institutions attended. DS is forecasting that global hedge fund assets will total $2.25 trillion before the year is out. A spokesman for DS expressed the belief that the post-quake volatility in the Japanese market will spur investments from hedge funds, which often thrive on volatile markets. This just proves that every major news event, whether good or bad, may have implications that can benefit one group or another. Earthquakes, because they are sudden and unpredictable, can enrich hedge funds that are properly positioned to benefit from the disaster experienced by others.