AlphaWeek and Sussex Partners' 2025 Report on the Japanese Hedge Fund Sector
The 2025 edition of the AlphaWeek and Sussex Partners Japan Hedge Fund Industry Survey presents an insightful analysis of the Japanese hedge fund industry, focusing on performance, investor attention, ESG considerations, and market dynamics.
1. **Performance and Corporate Governance Trends:**
The Tokyo Stock Exchange's corporate governance reforms have led to improved capital allocation, higher profit margins, and increased share buybacks in 2024. Despite strong EPS growth over the past decade, aggregate return on equity (ROE) has been capped at around 10%, influenced by retained earnings inflating the denominator. Activist investors have gained prominence, with 94 de-listings on the Tokyo Stock Exchange in 2024 aimed at improving market quality. Baillie Gifford’s Smaller Japanese Fund demonstrated a strong performance, with the top 10 stocks up around 30% on average in 2025.
2. **Investor Attention and Market Dynamics:**
Japan's mutual fund market is projected to surpass US$1 trillion in total assets in 2025, despite recent soft fund flows. There is a notable shift from active to passive mandates among investors, putting pressure on active managers' economics. Institutions are increasingly allocating to private assets to enhance portfolio returns. Retail investors are reallocating more into equity funds, particularly using NISA accounts, favouring managers with strong product offerings and distribution capabilities for high-net-worth and retail clients. Macroeconomic factors such as buoyant Japanese equities and demand for Japanese government bonds as a safe haven amid U.S. Treasury market volatility give an edge to managers specializing in these assets.
3. **ESG Considerations and Thematic Investment:**
Japanese hedge funds and equity funds are increasingly incorporating ESG and governance factors into their investment processes. The WisdomTree Japan Opportunities Index, for instance, allocates a significant portion of its portfolio to "Corporate Governance Improvers" and thematic opportunities related to geopolitical developments, technological trends, and macroeconomic changes. Dynamic currency hedging is used based on signals including fiscal and monetary policy shifts, reflecting sophisticated risk management aligned with ESG and thematic considerations.
The report, titled "The AlphaWeek and Sussex Partners Japan Hedge Fund Industry Survey, 2025 Edition," was conducted by AlphaWeek and Sussex Partners and edited by Greg Winterton. It is copyrighted by The Sortino Group Ltd. and is available for download. The survey highlights that a majority of Japanese hedge fund managers believe that global investors do not pay them enough attention, with 74.07% of respondents not considering Environmental, Social, and Governance (ESG) factors when entering into a position in 2025, up from 57% in the previous year. However, governance is the leading pillar of ESG for Japanese hedge fund managers.
The report also indicates that a strong majority of Japanese hedge fund managers, 92.59%, are bullish about their medium-term prospects in terms of delivering alpha. Reproduction, storage, or transmission of the report is subject to certain conditions and permissions. The Bank of Japan ended its negative interest rate policy in 2024, and the current interest rate is 0.5%.
[1] Referenced from the original bullet points for Baillie Gifford’s Smaller Japanese Fund performance. [2] Referenced from the original bullet points for mutual fund market growth, shift to passive investing, allocation to private assets, and retail investor preferences. [3] Referenced from the original bullet points for the WisdomTree Japan Opportunities Index, ESG considerations, and dynamic currency hedging.
- Investors could potentially benefit from considering Baillie Gifford’s Smaller Japanese Fund, as it demonstrated a strong performance in 2025 with the top 10 stocks up around 30% on average, indicating effective risk-taking and financial gains through investing.
- Those looking to enhance their portfolio returns may want to consider allocating to private assets, a trend that institutions are increasingly pursuing in Japan's rapidly growing mutual fund market, which is expected to surpass US$1 trillion in total assets by 2025.
