Interview with Yashwant Bajaj at Hachiman Japan Fund

Hachiman Japan Fund is a Japan long/short equity fund that is run by Toru Ueda and Yashwant Bajaj in Tokyo. Toru, CIO, has 16 years' buy-side experience overseeing US$2 billion at Mercury (as head of institutional funds and research) from 1987 to 1997 and US$5 billion at PPM Japan from 1998 to 2001. Yashwant, CFO, has 19 years' Japanese equities sell-side experience and also has experience in equities, CB, listed and unlisted derivatives, having worked with Nikko Securities, Kleinwort Benson, Dresdner Kleinwort Benson and Lehman Brothers.

The fund was launched in January 2005 and currently has US$4 million under management.

  1. Can you briefly explain the organisational structure of the firm and what each of your role is?

    Toru and I are 50:50 partners of the firm. Toru is the overall portfolio manager with decision rights on stock inclusion and exclusion, I am the risk manager with risk management override rights and CAO. We both conduct analysis on our "core universe" and "shadow universe" of companies. The third member of our team, Jason Jones, is based in Singapore and conducts trading, daily administration for the fund and is the office manager for Hachiman Capital Management Singapore

  2. How long have the two investment principals known each other and why did you want to launch a hedge fund, and why as partners?

    Toru and I have known each other for ten years, starting with a relationship when I was head of sales at Kleinwort Benson and his institutional salesman when he was head of the fund management team at Mercury Tokyo. We have been involved with each other on a professional and personal level since then. When I was looking to set up a hedge fund last summer, Toru was at the top of my list of senior market professionals with business set up experience and an entrepreneurial nature.

  3. Can you briefly explain your investment approach?

    We focus primarily on a universe of $1-8 billion market-capitalisation companies. Within this we conduct bottom-up research on a proprietary "core" and "shadow" universe of companies. Without going into details here, our philosophy is to focus on companies with demonstrable, clear business drivers where these can be correlated with historical share price performance. As such, for example, we would not look at diversified companies or sectors where there is little share price correlation with the companies underlying business performance.

    Our investment process looks for anomalies in a range of valuation criteria, focusing on the most relevant for a particular company or industry. When we find these we test these against market consensus, empirical data and finally company management feedback. From there a collective decision is made to either include or exclude a position and a target valuation and share price is set. A rolling 6-month research review process is conducted on all covered companies.

  4. Are there any sectors which you will not cover?

    As described above, we will not cover diversified companies and sectors with little correlation of share price with business drivers, eg, IDMs, utility companies.

  5. Regarding shorts, it appears that companies in Japan can have flawed business models and tarnished brands but still rise 10-15% in one day on rumours of foreign buyouts. How do you protect your short book on, say, short borrowing Daiei days before someone whispers that Wal-Mart will buy it?

    We would typically not be involved in cases like the one you have mentioned - takeover or restructuring potential valuations are actually strongly reflected in our current long book. More likely you will find companies where consensus valuations are dramatically different from our proprietary research or the business model is misunderstood or failing in our opinion, against consensus views to the contrary.

  6. How actively can one short borrow in the Japanese mid-cap (US$500m - US$1bn) space? Will the fund's short book be focused on more large caps (>US$1bn); and since those names are so well covered by the Street, where is the edge?

    We have tested liquidity constraints on our universe with historical liquidity screens and believe that the portfolio is scalable without altering our set out number of positions (typical median is 25 long, 25-30 short) up to US$300 million. With an increase to approximately 120 overall positions, we believe it is scalable to US$700 million capacity.

    The long AND short books will focus at US$1-8 billion companies. We are acutely aware of potential beta and other risk mis-matches between long and short books by having a short book constituted with significantly different market cap to our long book. The median market cap of the short book companies is US$3.5 billion larger than that of the long book.

  7. With the success of funds like Tower and Arcus, many new hedge funds focusing on the mid- to small-cap space have started over the past 12 months. Is there concern that this space is getting crowded?

    The current funds tend to have, in our opinion, generally a mid-cap universe which is smaller market cap than ours - we would describe this area as small cap, particularly on the long book. Also our universe of company coverage without giving any numbers away here, is smaller and more concentrated. Finally, throwing modesty aside, our experience base is a significant edge.

  8. What is the strategic reasoning for having between 20-40% of the portfolio in pair trades? Will these be model-driven pair trades?

    The pairs are fundamentally driven and are loosely defined - supply chain pairs, sector competitors are two examples. The pairs are not delta neutral and typically have significant size and return differences on either side, ie, they are net directional in view.

  9. Do you envision that you will have a portion of the portfolio that you will trade aggressively, or are the plans to be more long-term investors?

    There is no set rule other than opportunity cost driven by annualised return of the positions. We typically, however, would look for positions with a 6-12 month return profile to target valuation. We participate in IPOs and POs when these concur with our fundamental views.

  10. Can you explain the fund's risk management policy - where you view the risks are in running a Japan L/S fund focused on mid caps; what are the risk guidelines; how are they monitored (ie Beachamp) and how are they enforced (by Jason Jones in Singapore)?

    We operate hard individual position stops and portfolio stops that reduce gross exposure. I tend to monitor volatility changes on individual stock positions, particularly on the short book where "step" changes occur. These typically would trigger risk reduction of the position independent of our hard stops. Typical examples of this occurring are when retail activity builds dramatically in a stock, skewing performance away from fundamentals beyond our normal portfolio management controls. I also use our prime broker VaR and other risk analytic tools for risk management.

  11. What are your current market views, especially with the steep sell-off of growth small/mid caps since the summer?

    We are generally positive on our space and having been running a 30-40% net long bias.

Contact Details
Yashwant Bajaj
TY Advisers
+ 81 3 5456 5143