Investors flee Japanese hedge funds

By Alison Tudor

TOKYO (Reuters) - Investors pulled $7.7 billion (3.9 billion pounds) out of laggard Japanese hedge funds last year, more than a fifth of their investments, prompting a shake-up of the industry and draining the faltering economy of prized foreign capital.

The Japanese hedge fund industry has been the pariah of the asset class after two years of losses, and has shrunk to $24 billion. By contrast, funds in China and India have been raking in investors' cash and enjoying strong returns, helped by booming economies and soaring stock markets.

Some Japanese hedge funds are responding by closing shop, adopting a pan-Asian strategy, or cutting management fees in a last ditch attempt to stem the flow of capital.

"Folks are panicking about their ability to make money in Japan, and are looking to incorporate Asia into their portfolio," said Edward Rogers, of Rogers Investment Advisors, which advises a fund of Japanese hedge funds and is up 6 percent in 15 months.

Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) is among the latest to join the exodus from Japan. The Wall Street powerhouse told Reuters it has closed a fund of hedge funds, GS Strategic Japan Partners, which invested in Japanese funds. Financial sources said it closed the fund after a run of losses and investor redemptions.

"Japanese fund managers acknowledge their performance has not been very good, resulting in redemptions," said Hideki Hashiguchi, lead representative of HSBC Global Fund Services Ltd.

The flight of capital is a blow to the Tokyo Stock Exchange , whose head, Atsushi Saito, has been campaigning to attract more foreign investment in order to maintain the bourse's standing as one of the world's biggest markets, particularly against growing Asian competitors such as Singapore and Shanghai.

Japanese hedge funds lost a combined $10.9 billion in 2007, through poor performance and after $7.7 billion of investor redemptions, according to industry data provider Eurekahedge.