The next gold mine in the Japanese stock market? American hedge fund Verdad targets small-cap stocks in search of "alpha"

According to Zhitong Finance APP, Boston-based hedge fund Verdad Advisers LP is planning to launch a new Japanese equity fund that will primarily invest in small-cap companies. This move indicates that global investors are no longer limited to investing in Japanese blue-chip stocks but are looking towards Japan's revitalized stock market for greater returns. Daniel Rasmussen, founder of Verdad Advisers, stated in an interview on September 17 that the fund could launch as early as this year, and its operation will continue the strategy of the firm's existing two small-cap funds, which focuses on identifying issues related to inefficient capital usage, such as excessive balance sheet debt or high cash reserves. He also mentioned that the target market capitalization for the new fund will exceed $400 million. Rasmussen said, "If you delve into the thousands of small-cap stocks, you'll find that their price movements are more extreme, which contains greater investment opportunities. Once you enter the large-cap stock domain, the market becomes very mature, making it very difficult to achieve high profits." As the Tokyo Stock Exchange promotes initiatives to enhance the profitability of listed companies and shareholder value, hedge funds holding Japanese assets have regained favor. Some hedge funds have turned to small-cap stocks that have lagged in capital efficiency and are undervalued. Activist investor Asset Value Investors Limited stated earlier this month that it plans to increase its holdings in small-cap and mid-cap stocks. Japanese small-cap stocks have performed strongly. The index measuring small-cap stocks has outperformed the large-cap stocks on the Tokyo Stock Exchange this year, with a rise of 19%, while the large-cap index has increased by 14%. The MSCI Japan Small Cap Value Index has surged by over 30%. For example, as of the end of August, the two existing funds managed by Verdad have achieved a return of 39% this year. According to Rasmussen, with such performance, the total assets managed by these two funds have reached $300 million—approximately a quarter of Verdad's total assets. For the new fund, he plans to increase its asset size to over $1 billion in the coming years. As part of its expansion plan, Verdad intends to hire one or two analysts specializing in quantitative and fundamental analysis in Japan. He noted that family offices and institutional investors in Europe and the United States are part of Verdad's client base. Nevertheless, the small-cap strategy still faces numerous obstacles. Limited liquidity restricts the number of stocks investors can hold, and smaller companies provide less English disclosure information. A survey by the Tokyo Stock Exchange confirmed this, showing that as of December 2024, only 37% of companies with a market capitalization below 25 billion yen (approximately $169 million) will issue English announcements, while the proportion for companies with a market capitalization of 100 billion yen or more is 63% Rasmussen stated that sometimes he needs to further explain the concept of capital efficiency in the West to the management, but by diversifying the portfolio into 50 to 100 stocks, he is able to have enough patience to wait. He said, "Companies that you originally thought would never make changes are now increasingly inclined to meet the needs of shareholders."