11/13/2025
In Activist Paradise Japan, Hedge Funds Rake in 1.7 Times Global Average
Nikkei Asia (11/13/25) Ishikawa, Hihiro; Tamura, Takahisa; Sato, Risa
Hedge funds investing in Japanese stocks have seen their returns soar to 1.7 times the global average this year, as activist investors jump on opportunities created by a broader push for corporate governance reforms. Activist investors have taken the strategy of guiding stock prices higher by proposing corporate reforms that are likely to be welcomed by the market, such as those aimed at improving capital efficiency. Their efforts have paid off, bringing in new capital and contributing to the rise in Japanese stocks. The average total return rate from January to the end of October for funds investing in Japanese assets, including stocks, was 16.41%, according to a hedge fund index calculated by U.S.-based Hedge Fund Research. The figure far outpaces the global average of 9.77%, North America's 8.84% and Europe's 7.19%. This year's figure for Japan is the highest since the 16.71% logged in 2017. In 2023, Japanese returns were 7.23%, slightly higher than the figures for North America and Europe. But in 2024, Japan's 9.4% lagged behind North America's 12% and Europe's 10.67%. In April of this year, when stock prices fluctuated wildly due to U.S. President Donald Trump's tariff policies, returns from investments in the North American and European markets hovered near zero across the board. Funds operating in Japan, meanwhile, raked in a 3.36% return. Activists target companies whose low price-to-book ratio (PBR) and return on equity (ROE) leave their stock prices undervalued. As shareholders, they propose a variety of measures to improve corporate value, including increasing dividends and share buybacks, selling unprofitable businesses and replacing management. In some cases, they seek to take a company private. Broadcaster Fuji Media Holdings' (4676) shares have risen 97% since the beginning of the year. At a June shareholders' meeting, U.S. activist Dalton Investments nominated 12 independent director candidates in a bid to effect management reform. Reno, a Japanese investment company associated with activist investor Yoshiaki Murakami, also called for the spinoff of Fuji Media's real estate business. The company responded by announcing a plan to assess the profitability of each business and implement streamlining measures. It also plans 250 billion yen ($1.62 billion) in share buybacks by fiscal 2029. Alcoholic beverage maker Takara Holdings (2531), in which U.S. firm ValueAct Capital was revealed to be a major shareholder in August, has seen its shares rise 8% since the beginning of the year. On Tuesday, U.S. firm Elliott Investment Management confirmed that it holds a significant stake in Toyota Motor (7203) supplier Toyota Industries (6201), whose closing price on Wednesday rose 2% from Monday's close. Amid a global stock market boom fueled by artificial intelligence and expanding investment funds, Japanese stocks continue to reach new highs. While traditional hedge funds -- which combine buying and selling -- find it difficult to make profits amid the rapid rise in stock prices, activist funds -- which primarily buy and hold -- appear to have driven the hedge fund index's rise. Other investors, including institutional and retail players, are following activists' lead, providing further tailwinds for stock prices. There were 75 activist investors in the Japanese market as of Oct. 30, a 60% increase over five years, according to consulting company IR Japan. Activist holdings of Japanese stocks exceeded 12 trillion yen as of October, accounting for 1% of the total market capitalization of Japan's listed companies, according to Okasan Securities. With less of a focus on shareholder-conscious management than in the U.S., many Japanese companies have long suffered from low capital efficiency. While 40% of companies on the S&P 500 have an ROE of 20% or higher, nearly 60% of companies on the Tokyo Stock Price Index have an ROE of 10% or less. The proportion of companies with a PBR of less than 1 is still stuck at 40%. Corporate governance reforms that began under the administration of former Prime Minister Shinzo Abe are creating an environment that is more welcoming to activists. In March 2023, the Tokyo Stock Exchange requested listed companies to take steps toward achieving management that takes capital costs and stock prices into consideration, urging companies with a PBR under 1 to improve. The unwinding of strategic shareholdings in line with the governance reforms has given activists another boost. With fewer stable shareholders, companies have no choice but to face shareholder proposals from activist funds head-on. "Japanese companies, once thought to be unchanging, are now increasingly seen in the market as starting to change thanks to the involvement of activists," said Naohide Une, senior partner at Investment Lab, which manages Japanese stock funds. Improved returns stemming from rising stock prices are increasing the investment capacity of activist funds. Masahiro Koshiba, CEO of United Managers Japan, which has been involved in Japanese stock management since 1990 and began managing hedge funds in the 2000s, recently launched an engagement-based fund that emphasizes dialogue with investment targets. The fund's management team includes David Snoddy of Nezu Asia Capital Management, who has significant experience managing Japanese stocks. "Engagement-based funds are gaining momentum like never before," Koshiba said. Achieving a sustainable increase in ROE requires both shareholder returns and improved profit margins. However, "the number of [activist shareholder] proposals aimed at pursuing short-term profits has not decreased," said Masataka Kawabe, chief analyst at Sparx Asset Management.
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