The Truth About U.S. Stock Investments from Shigenobu Kawada: “Training in U.S. Stocks through the Media” [Vol. 43] Distributed on April 18, 2022
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The Truth About U.S. Stock Investment
［Vol.43］ Distributed on April 18, 2022
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Kawada Shigenobu's "Strengthen Your U.S. Stock Investment with the Media"
*** Table of Contents ***
Market Review
This Week's Picked Articles
Kawada's Notable Stocks
Investment Tips
A Walk
A Moment: “Vision from FAs”
What is the Private Investment Strategy Practiced by Ultra-rich?
Activity Information
New Project [How to Read Nikkei to Enrich Your Life]
A project that picks up articles from Nikkei Newspaper that I, who has been reading it for over 40 years since entering the workforce, find interesting and comments on. It is held every Saturday from 9:00 to 9:45 AM as a Zoom participation format.
Participation is free, so if you are interested, pleaseregister on Peatix.
Below are some of the article titles covered last Saturday.
Online Salon “Dreams Come True Asset Formation School”
This online salon is for learning together and inspiring each other so that everyone can succeed in asset formation. In addition to the highly popular newsletter “Training in U.S. Stocks through Media,” we offer member-only seminars that convey content beyond what the newsletter can cover and allow you to feel the魅力 of U.S. stock investing.
2000 Million Yen Milestone Pace Maker
Source: Financial Services Agency Asset Management Simulation prepared by ExeTrust Co., Ltd.
*The above figures are for simulation purposes only and do not guarantee future investment results. Fees and taxes are not taken into account.
Pronunciation: Assumed yield and attainment deadline
3–4% for over 30 years: this is the wrap fund or balanced fund
5–7% would take about 25 years: perhaps for non-U.S. stock funds
8–10% about 20 years: given the modest rise of the S&P 500
S&P 500 Performance Track Record (dividends reinvested 1970-2021)
Let's achieve 2000万円 (20 million yen) early through proper risk-taking
Kawada's message is incredibly simple. To reach 20 million yen, let money work as efficiently as possible with available surplus funds. For that, it is crucial for participants to correctly understand the meaning of risk and reward. Before reading the weekly newsletter, glance at this table and confirm the correct investment stance.
Now, start the countdown to reach 20 million yen right away!
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1. Market Review (April 11 – April 14)
Major Indices
- Dow Jones Industrial Average -0.8%
- S&P 500 Index -2.1%
- Nasdaq Composite -2.6%
＝Speed Version＝
Stock prices fell due to rising interest rates prompted by the March CPI release and remarks on tightening. Company earnings did not provide support, and with investors cautious ahead of the Easter holiday on Friday, selling was concentrated in growth stocks.
＝A little more detail＝
In addition to last week's trend, risk-off ahead of the March CPI release led to continued increases in long-term rates, which caused the decline in stock prices.
The CPI released on Tuesday showed year-on-year growth of +8.5%, the highest since December 1981, but together with the Producer Price Index released on Wednesday, it largely matched market expectations, and interest rate increases eased for a moment.
However, comments from Fed officials such as Chair Powell and New York Fed President Williams indicated a proactive stance on rate hikes, and rates rose again toward the weekend.
The stock market, affected by rising rates, moved downward especially in growth stocks.
Q1 earnings season has begun for 2022, but currently results are mixed and have not provided strong support for the stock market.
S&P 500 Chart (1 year)
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2. This Week’s Picked Articles
A column that selects and ranks information useful for asset formation from what I have personally found, and comments with a very private perspective.
【1】News Morning SatelliteThe fate of the U.S. midterm elections and Biden administration】April 14 (Thu) TV Tokyo, Marubeni Economic Research Institute, Takashi Imamura
“There is a possibility that the majority in Congress may change. It could affect the 2024 presidential election as well. The opposition party, the Republicans, are likely to regain the majority in both houses.”
Three reasons: ① Biden's low approval rating, ② high inflation, ③ waning interest in Ukraine.
In the Senate, 35 of 100 seats are up for election. Republicans are currently at 21 seats versus Democrats at 14, which would seem unfavorable for Republicans. However, forecasts show Republicans with 19 and Democrats with 11 seats, with 5 as close races. Democrats lose even one seat and become the minority, which is unfavorable.
In the House, based on national party support, Republicans lead by about 3 points; Democrats are slightly disadvantaged. The campaign season truly heats up after September. The situation can still change.
Inflation will determine outcomes, but Biden has few options. It depends on Fed tightening. If recession fears rise, it will hurt Democrats. If inflation abates thanks to tightening, voters’ discontent may ease. Expect continued focus on inflation trends.
【2】2022 Midterms and the U.S. Economy by Piaget Isikawa
The ruling party typically loses seats in midterms.
【3】Barron’s DigestStock bottoms near? Investors Beware: Stocks Are Approaching the Worst Part of the Year｜【WEEKLY】April 10, 2022 issue
Midterms and stocks in the U.S.
May is half a year before the November midterms. In the 4-year presidential term, this period is the weakest for stock prices. The worst is typically the president's first term. Among them, the worst is the first term of a Democratic president.
Since 1926, the average return of the S&P 500 from May to October of the second year of a presidential term (2022, 2018, 2014, 2010, 2006, 2002, …) is +2.26%, the lowest six months. In contrast, the total return from November to April of the following year (the third year of the term) averages 13.9%.
Among small-cap stocks, this trend is even more pronounced. May–Oct total return is 2.5%, while Nov–Apr is 19.2% on average.
Stock price declines since 1962
Midterm years tend to fall more. The average drop in midterm years is 19%, while other years average 13%. However, after the sharp midterm year's drop, the market has recovered an average 31.6%.
“Regardless of whether it is a change of administration or re-election, disappointment in the administration tends to intensify in the second year, and investors express their discontent before the November midterms.”
Many significant stock price declines in midterm years have been the “bear killers” that mark long-term downturns; in other words, in these scenarios price action is more of a buying opportunity than a selling one.
Since 1960, there have been 14 instances where the S&P 500 fell more than 19%, and in 10 of those cases the bottom occurred in midterm years, with 8 of those bottoming in the typically weak May–October period. This includes notable bottoms in 1974, 1982, 2002.
The sharp stock price declines in midterm years often begin with negative first-quarter returns. This year, the S&P 500 declined in Q1. “In midterm years, what we are seeing now has parallels with past events: war, trade frictions, inflation, recession, and rising interest rates.”
【Kawada's Comment】
The May–October six-month performance in midterm years is not good historically. Indeed, a few of these periods show volatility.
In such cases, how should we approach the market? My conclusion is to calmly wait for the storm to pass without wavering.
Because,
① Even if performance during this period is weak, the average return remains positive.
② 2016 and 2018 also experienced large fluctuations outside May–Oct.
③ There are years like 2014 when everything rises smoothly.
In short, the market is a living creature, so past averages do not guarantee future results. If you believe in the long-term ascent of the U.S. market, avoid frequent trading and, if you have additional investment capital, be ready to deploy it.
S&P 500 Long-Term Log Chart (since 1960)
S&P 500 Performance (1970-2021)
【4】Kawata's Economic Deep ReadingMizuho Research & Technologies Executive Economist “Economic Deep Reading” April 7“How to Respond to a Bad Yen Weakness”
There are three reasons why the current yen weakness is disadvantageous.
(1) High international commodity prices accelerate costs. However, only about a quarter of import price increases are due to yen depreciation; more of it comes from overseas conditions.
(2) The benefit of yen weakness to inbound tourism cannot currently be leveraged. The Big Mac price parity is about 67 yen per dollar, so foreigners feel prices in Japan are about 40% cheaper, but this effect is not being utilized now.
(3) The benefits of yen weakness concentrate for global companies; the drawbacks hit households and small businesses broadly. In terms of the number of economic actors, more people suffer from yen weakness than benefit. Lately, there is much debate whether yen weakness is overall positive for Japan, and even if it is, the positive impact is unlikely to be large.
Criticism of the BOJ is natural
In this phase, there is some justification for the argument of “bad yen weakness.” The cause includes differences in monetary policy between the U.S. and Japan, so criticism of the BOJ is natural.
However, the differences in monetary policy between the U.S. and Japan reflect three major points and thus the BOJ cannot do much about them.
(1) There is a difference in aggregate demand strength between the U.S. and Japan. The U.S. CPI year-on-year is about 8%, and a substantial portion is due to strong demand.
(2) Japan’s terms of trade have deteriorated significantly, but in the U.S., crude oil and food are produced domestically, so terms of trade do not deteriorate. Japanese companies face cost pressures and cannot raise wages.
(3) Since before the financial crisis, long-term inflation rates in the U.S. and Japan have differed. U.S. inflation was in the mid-1% range pre-COVID. Japan has long been in zero inflation as a norm.
BOJ has no remedy
Therefore, even if the BOJ contemplates additional easing, expecting rate hikes is unrealistic. If we go back to the fundamental question of whether to maintain the 2% price stability target, there is much room for discussion, but since the BOJ has decided to maintain the 2% target, there is no option but to continue extreme monetary easing for a long time.
No matter how much prices rise this summer or how weak the yen becomes, as long as the 2% price target exists, a day when interest rates rise in Japan will not come. Some worries claim “Japan selling” or “loss of confidence in the yen,” but these concerns are an overreaction.
From the fundamentals of the Japanese economy, it cannot be called an excessive yen weakness. Since the yen’s current weakness has been somewhat inevitable, correcting it is difficult.
[5] Nikkei NewspaperYen weakness “BOJ should change policy” “Household pain” Experts weigh in 4/13
① Yuichi Noguchi, Emeritus Professor at Hitotsubashi University
BOJ should tolerate rate increases
Small and medium-sized enterprises lacking price pass-through power are especially affected. In the past, yen weakness policies supported exports and the maintenance of corporate hubs, but they no longer function effectively.
To stop yen weakness, a change in BOJ policy is essential. Stop suppressing long-term interest rates and tolerate rate increases. If substantial measures in monetary policy are not taken, import prices will continue to rise. This will be a major issue in the House of Councillors election.
② Ryutaro Kono, BNP Paribas Securities Chief Economist
Concerns about productivity-weak firms
Ultra-low interest rates and yen weakness policies have become fixed, which has allowed only those firms to survive. If productivity of firms is low, real wages do not improve, and the positive cycle from income to expenditure does not work.
In today’s inflationary environment, yen weakness accelerates import price rises, harming households. With consumer spending not recovering, the economy is depressed. Macroeconomic policy should dampen economic fluctuations, but instead it amplifies them. If Kishida’s government secures support in the upper house election, the BOJ may shift to widening the long-term yield target within the year.
③ Reiko Sera, Market Strategist at Sumitomo Mitsui Trust Bank
Households are in the most difficult position
【Kawada's Comment】
Mr. Kadama's explanation is understandable. However, the latter part, “the BOJ has no means,” is troubling. To balance this, I’ve lined up opinions of three commentaries from Nikkei morning edition.
In such cases, one should note the commentators’ affiliations and prior positions. Kadama is a BOJ alumnus and appears deeply involved in policy setting for the 2% price target. It’s natural to view him as aligned with the BOJ and major Japanese financial institutions.
Noguchi is a former Ministry of Finance official and always sounds reasonable to me. For example, Kadama states, “Since the BOJ has decided to maintain the 2% price target, there is no option but to continue extraordinary easing,” while Noguchi says, “BOJ policy changes are indispensable.” How to assess the difficulty of BOJ policy change? Kadama treats it as a high hurdle and excludes it as an option, whereas Noguchi treats policy change as a must.
Also, Kono has experience in several Japanese financial institutions and now at his current company. He isn’t bound by domestic ties and does not give the impression of being a tool for foreign openness or reform. He still notes, “Ultra-low rates and fixed yen weakness are causing more firms to survive only under those conditions,” and “if productivity remains low, real wages won’t improve and the positive cycle between income and spending won’t work.” Reasonable.
Noguchi’s and Kono’s analyses and recommendations sound reasonable, but my view is whether they are realistic options in Japan. Considering regional views and the voices of the elderly, what will trigger reform?
By the way, Sera is affiliated with a major financial institution, so her tone is systemic and aligned with the establishment. Such comments are for quick skimming.
3. Kawada’s Interesting Stocks
In this section, I present interesting stocks among those I hold or that I encounter in U.S. stock information.
This week’s stock
Palo Alto Networks Ticker: PANW
Overview
Palo Alto Networks provides network security services. Its services are valued for evolving with network security environments, and the company serves as a top industry player in more than 150 countries.
What makes the company attractive
Evolving with the network environment
Computer security changes with the times. In the past, security was ensured by building a strong wall and operating devices inside it. However, with more convenient access via mobile devices and cloud environments, the methods to secure security have changed (devices, software, etc.).
Palo Alto Networks has captured this wave of change and grown into a leading provider by making about 17 acquisitions over the past nearly four years, creating a state-of-the-art, comfortable security environment. These acquisitions were led by CEO Nikesh Arora. Many may recall that he previously served as a director at SoftBank in Japan and was touted as a future president candidate, but resigned just before the 2016 shareholder meeting.
Arora, though relatively inexperienced in security, identified two strategic axes for acquisitions and succeeded. One is cloud-based application security, and the other is security operations center (SOC) automation using data and AI. The latter allows SOC professionals to focus on harder problems.
Security industry tailwinds
The demand for security has increased due to more remote work during the third year of the pandemic and more cyberattacks following Russia’s invasion of Ukraine. Gartner forecasts security-related spending to rise from $137 billion in 2020, to $155 billion in 2021, and to $172 billion in 2022.
Palo Alto Networks focuses on Prisma SASE and Strata for secure network rebuilding, Prisma Cloud as the cloud security offering, and Cortex for security operations automation, all showing strong growth.
(Figure 1: Prisma SASE customer growth)
(Figure 2: Prisma Cloud customer growth)
(Figure 3: Cortex customer growth)
Sturdy Earnings
In addition to broader spend on network security, ongoing revenue from existing services and the company’s acquisitions support steady revenue growth.
(Figure 4: Total revenue trend — year-over-year growth and quarterly progression, in millions)
This is supported by large recurring revenues from annual maintenance contracts. Given the nature of security services, customers are unlikely to switch providers frequently, enabling continued earnings growth.
(Figure 5: Expected annual recurring revenue from next-generation security service contracts, in millions, annualized)
Moreover, although total revenue is growing at 20–30% annually, operating margins are around 20%, providing a strong driver for R&D and acquisition strategy.
(Figures 1–5 are from company materials)
Risks
Founded in 2005, the company typically expands through growth but carries significant debt, including debt from past acquisitions, which may undermine financial stability if interest rates rise sharply. Additionally, even in the current market where growth stocks are under pressure, the stock has remained robust and appears overvalued. If earnings fail to meet expectations or a large acquisition announcement occurs, the stock could drop sharply.
PANW basic data (Source: company data, Yahoo! Finance)
(As of April 14)
Stock price $626.78
Market cap $61.73B
Total revenue $4.86B
Expected P/E N/A
Trailing yield N/A
Headquarters: Santa Clara, California
Listed: July 2012
Stock chart: 5 years
Charts powered by TradingView.com
(This column is intended for general information only and does not constitute solicitation to buy or sell any securities)
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4. Investment Tips
In addition to “investment methods” and “stock picks,” this section covers “interesting indicators or statements” and “social and political developments.”
Recently, stock splits have been announced more frequently in the U.S. stock market. I will consider this in context of related articles from Barron’s Digest.
“Barron’s Digest” April 10, 2022 issueWhy investors welcome stock splits
Recently announced stock splits include Alphabet GOOGL, Amazon AMZN, and Tesla TSLA, and in each case the stock price rose afterward. Since 1980, among S&P 500 constituents that announced stock splits, their performance over the following 12 months exceeded the index by an average of 16 percentage points.
In recent years, not only mega-cap stocks like Apple AAPL, Nvidia NVDA, and Tesla, but also less prominent names like Sherwin-Williams SHW, Amphenol APH, McCormick MKC have split their stocks.
Past stock splits
In the past decade, U.S. companies have split about 20 stocks per year. The peak of stock splits was during the late 1990s IT bubble, when between 1997 and 2000, the average yearly splits were 65.
The current median price of S&P 500 constituents is about $118. Companies that split tend to be high-priced, and when ordered by price, the top examples are: ① Berkshire Hathaway Class A BRK.A about $520,000; ② homebuilder NVR at $4,380; ③ Amazon at just over $3,000; ④ Alphabet about $2,500; ⑤ Booking Holdings BKNG at $2,300; ⑥ AutoZone AZO at $2,040; ⑦ Chipotle CMG at about $1,600; ⑧ Methodology International MTD at $1,350.
Amazon
Amazon announced a stock split on March 9 (1 for 20), and if approved by the shareholders, the split will be implemented in early June. They also announced a $10 billion buyback.
Past three stock splits all occurred before the IT bubble burst
Stock splits lower per-share price and open up access to a broader set of investors.
Below is about
Past three stock splits
Amazon’s stock splits are not new; there have been three in the past, but they occurred in 1998–1999, quite a long time ago.
The last split was on September 2, 1999, after which the stock rose 75% over the following months. However, in the subsequent years, performance faded and the stock failed to reach new highs for some time. Investors waited nearly 10 years for Amazon stock to embark on a real uptrend.
Since then, Amazon has soared higher, and since the last stock split, Amazon’s stock price has risen more than 4,700%.
Shopify SHOP
Shopify, the Canadian e-commerce platform, announced a stock split on the 11th. It will split 1 share into 10, the first stock split since its 2015 IPO. The company explained the aim is to make the stock accessible to all investors.
Driven by pandemic-induced demand, Shopify’s stock surged about 185% in 2020 and rose another 21% in 2021. As the economy normalized, growth slowed and this year the stock has fallen more than 50%.
Common rationale for stock splits
Lower price per share makes it easier for individual investors and employees to buy. In recent years, individual investors have gained more influence over markets and individual stocks, prompting companies to diversify the shareholder base beyond just institutions.
Although fractional trading is possible at brokerage firms, at Fidelity you can buy fractional shares in thousands of U.S. stocks and ETFs in one-dollar increments, and Robinhood users can buy as little as one one-millionth of a share.
According to Fidelity's spokesperson, last year 2.3 million accounts used fractional trading. Moreover, many investors rely on index-tracking ETFs, allowing them to hold the same index constituents at a lower price than the total value of the index.
Candidates for inclusion in the Dow Jones Industrial Average
Amazon and Alphabet are likely to become Dow-style price-weighted index candidates. Apple became a Dow constituent only a year after its 1-for-7 stock split completed in 2015.
Note that Apple has split its stock five times since its 1980 IPO; after the 1-for-7 split, its adjusted price was as low as 10 cents in the days after, which is notable.
Why stock splits?
Management signals that the stock will continue to rise after the split, and markets tend to favor insiders who are bullish. Stock splits also generate media coverage and interest from sell-side analysts. These factors contribute to repeated stock splits.
Nevertheless, stock price increases immediately after a split often reflect optimism about the company’s performance rather than a fundamental change in value. As the Amazon example shows, it can take almost a decade for substantial payoff, so stock splits are not a safe buy signal.
Still, as a psychological factor, a stock priced at $100 feels more approachable than one at $1500, all else equal. If your holdings allow it, the psychological effect can impact short-term price movements.
If you are trading stock splits, you should understand these nuances.
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5. Walking Corner◇◇Recent stores visited,movies, museums, books◇◇
～The Kawakura Tsuneyoshi Episode～
Contributor Kawakura Tsuneyoshi, a former securities professional and avid reader.
Losing the game/Charles Ellis
In recent weeks I have introduced books for individual investors, but I overlooked this foundational work.
My apologies for starting things with over-enthusiasm.
I found that the original edition was retranslated and issued in January this year, so I think it is meaningful to present it again.
Now, what has changed since its 1985 publication is that financial engineering has made indexing accessible to the masses.
Based on that assumption, the author has consistently argued since the mid-1980s that you should manage your household, secure funds for life events or emergencies, maximize returns from your immediate work, and invest if you have spare money.
Also, what is the secret behind this book’s continued popularity for more than 30 years?
One is that it is a book embodying “adult manners.”
The author emphasizes personal responsibility, including home purchases, children’s education, retirement living expenses, disaster preparedness, and charitable contributions to schools he studied, among other things.
None of these are trivial or easily solved, but the book does not provide one-by-one fixes; it advocates awareness and self-reflection.
It extols self-management of one’s life, aligning with American individualism, and the Japanese situation today is not so different.
Indeed, Americans’ experiences are bound to echo in Japan across time zones.
Blood and Soap / Linh Dinh
Reading the literature of different regions can be a way to understand unfamiliar worlds beyond Europe and the U.S. Nobel laureates also encourage attention to literature from the Third World.
During my student days, there was a wave of Latin American literature a year behind the West, and friends avidly read Garcia Marquez and Vargas Llosa (both Nobel laureates).
With Asia’s immense economic growth, works reflecting that growth were also introduced; Mo Yan won the 2012 Nobel Prize in Literature for China.
This book is a collection of short stories by a Vietnamese-American author, far from the forefront of global literary trends or economic growth.
I read the author’s travelogue in the February 2019 issue of the magazine Shincho and grew interested in her.
Ling Ding’s works include these two translations: this book and “A Tale of America Going to the End.” The former is a collection of short stories; the latter is non-fiction, both highly intriguing.
In this book, there are captivating short stories such as “The Inexplicable Ending at the Peak of Happiness—Our Bride and Groom,” “Stuart C. Lencho,” and “Costa San Jorge,” which vividly depict urban landscapes of despair.
So, can one understand the author’s Vietnamese background from this book?
The author, who fled to America in childhood, is a minority American and not Vietnamese. Therefore, it is more appropriate to view her works as American with a perspective from within; yet the source of her uniquely pessimistic style seems to lie in Vietnam, doesn’t it?
【Kawakura Tsuneyoshi】
1980 joined Daiwa Securities, later earned an MBA from the University of Chicago Booth School of Business as part of corporate dispatch; stationed in Singapore and Hong Kong, involved in Asian business.
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6. A Quick Break: “FA’s Perspective”
This is a Q&A section where financial advisor Ryuichi Motohashi answers customers’ questions about asset management.
Q: Are there any tips to join the ranks of the wealthy and live a comfortable, untroubled life?
A: The definition of wealth and asset ownership varies by person, and there is no single correct answer. However, interviews with many U.S. millionaires reveal seven universal laws.
These laws are based on three elements: discipline, independence, and hard work.
First, discipline: ① live frugally with expenses far below income, and ② devote time, effort, and funds to future asset formation.
Next, independence: ③ do not rely on parental financial support, ④ do not pretend to care about appearances, and ⑤ do not provide financial support to children just to relieve your own worries.
Finally, diligence: ⑥ pursue a job that truly suits you, and ⑦ skillfully seize business opportunities.
These are not exceptionally unique habits, but rather common mindsets that anyone can adopt.
The quantitative target amount is shared as the “expected asset amount,” derived from the formula: age × pre-tax annual household income ÷ 10 (subtract if there is an inheritance).
The logic is that higher income and longer working years lead to more savings.
Rather than aiming directly for a distant wealth threshold, aligning your current mindset might be the quickest path to success.
Aim for the neighbor’s millionaires!
Isn’t it surprising that there are scholars who study wealth in the U.S.? This study is full of persuasive, universal insights.
Here’s the reference book▼
The back of this book states, “Millionaires are not special people; with common sense and a little effort, anyone can become rich.” It’s easy to say, but hard to do… People who are truly wealthy are sometimes seen on a rural farm in worn T-shirts and jeans raising sheep (some say).
Yet in evaluating how to choose a financial advisor, the U.S. approach emphasizes avoiding cold calling and relying on referrals and personal interviews from trustworthy individuals—truly a hallmark of a financial power
After graduating in 1998, started a career in finance at Yokohama Bank. Later, he became a private banker at UBS. When the Lehman shock hit, he decided to pursue a career as an independent financial advisor who offers legitimate asset management guidance. Relying on a few clients, he has spent about 20 years in the finance sector, studying overseas PB and FA business models to improve client experience, and continues to work to enhance client value.
Currently, as an independent financial advisor not affiliated with any specific financial institution, he focuses on truly client-centered asset formation support and private financial consulting for clients.
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7. Private Investment Strategies of the Ultra-Wealthy
Hiroshi Ichikawa, who specializes in IFA sales support, explains in simple terms the investment strategies used by the ultra-wealthy.
Within private investment strategies, “private fund investments” are often private equity-type funds, but here we explain the relatively well-known “hedge funds.” You have likely heard of hedge funds.
What is a hedge fund?
The hedge fund’s main feature is its aim to generate positive returns regardless of market direction, i.e., absolute return oriented. This makes hedge funds popular among the wealthy, as profits can be realized whether markets rise or fall.
In recent years, hedge funds have gained recognition as attractive investment targets across investor classes, but their targets and methods vary widely.
Some funds invest in stocks with leverage, while others profit from falling markets by short selling. There are many investment approaches.
In other words, hedge funds are a conceptual term; to actually invest, you must carefully examine each fund’s strategy and manager track record.
Portfolio risk reduction
The main value of hedge fund investment is risk reduction for a portfolio. Hedge funds that are less correlated with overall market movements can act as a cushion when holdings decline in a downturn.
Therefore, hedge funds should be kept as a portion of a portfolio, and not pursued as the sole source of profits.
Examples of hedge fund strategies
Funds employ various strategies; here are common ones. Understanding these terms may significantly affect your fund selection, even if some terms are challenging.
・Global Macro
A strategy based on macroeconomic forecasts across countries, aiming to profit from movements in currencies, stocks, and bonds driven by macro indicators and interest rate fluctuations.
・Market Neutral
A strategy that tries to minimize market risk by nearly equalizing long and short positions, seeking returns from factors other than market movements.
・Equity Long/Short
A traditional strategy dating back to the 1950s that combines long positions in rising stocks with short positions in falling stocks, chasing profits from price differentials. Unlike market-neutral strategies, long and short holdings are not necessarily equal.
・Arbitrage
A strategy that profits from price differences between related instruments or securities, focusing on temporary mispricings.
・Event-Driven
A strategy that profits from events such as reorganizations, distress, or mergers, where price swings can be extreme.
There are other hedge fund strategies, but we omit them here.
Notes on Hedge Fund Investing
Hedge funds seek absolute returns and portfolio risk reduction, but there are unique cautions. Key points:
・Manager skill matters
The fund manager’s ability significantly influences downside risk. It’s not easy to assess whether a manager can truly generate profits.
・Redemption restrictions
Hedge funds often impose redemption limits. Withdrawals may only be possible at set dates (quarterly, etc.) and investors must apply well in advance (e.g., 45 days).
・Opaque operations
Unlike mutual funds, hedge funds provide limited disclosures, and daily trading results are not usually transparent. Many hedge funds trade daily, but performance reports can be over a month old and may not reflect real-time conditions.
If investing in hedge funds, limit exposure to a portion of the portfolio. Also, “absolute return” does not necessarily imply huge profits; understand this when investing.
【Ichikawa Hiroo】
Investing Techniques to Become Ultra-Wealthy
CEO, Winviser Co., Ltd. After working in asset management consulting at SMBC Nikko Securities at branches in Ibaraki, Fukuoka, and Tokyo, he moved to marketing of financial products for the ultra-wealthy.
He transitioned to an Independent Financial Advisor (IFA) role, providing asset management advice for the ultra-wealthy, and later established a support company focused on IFA development to advance Japan’s financial industry. He now offers second opinions on asset management to individual investors, while continuing IFA support work.
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8. Future Activity Information
◇ Stock Voice: Wednesday, April 20, 11:00
◇ Nihon Keizai CNBC: Wednesday, April 20, around 8:17, by phone interview
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