Japan to eye hedge funds

Japan’s Financial Services Agency said today that it will begin monitoring hedge funds that operate in Japan, according to published reports.
Hedge funds that invest in Japan currently account for about $36 billion under management, have been performing poorly of late due to a slide in company stock prices, according to a Reuters report.
Most Japanese hedge funds follow a similar strategy, buying small-cap stocks and shorting more liquid larger-cap shares, so when prices move against them they may sell and at the same time exacerbate falls in prices, according to the report.
Singapore-based Eurekahedge Pte. Ltd.’s index of Japanese hedge funds was off 3.4% in 2006 and is up 1.3% year to date.
The fact that hedge funds are adopting similar strategies has also worried the Bank of Japan because it could represent a risk to the stability of financial markets, the report stated.
The Japanese Central Bank is concerned that if a large hedge fund ran into trouble similiar to what happened to Greenwich, Conn.-based hedge fund Amaranth Advisors LLC when it lost $6 billion due to bad energy trades last September, then that ripple effect could impact world markets.