A Bermuda-based hedge fund firm is betting that US charitable foundations and pension plans will invest in Japanese stocks if they could both buy stocks and sell them short.

Bermuda-based Investor Select Advisors launched a hedge fund earlier this year that invests in a variety of other hedge funds that invest exclusively in Japan, Dow Jones Newswires reported. "The Ichibanboshi Fund was seeded in March with a few million dollars of the firm's own capital and will be available to investors around the world sometime next year," the story said.

"ISA also has an agreement with Shinsei Bank to sell a clone of the Ichibanboshi Fund to institutional and retail investors in Japan. The clone fund will be launched in February, 2003."

The story said both funds allocate money to managers who employ a variety of investment strategies, including funds that both buy Japanese stocks and sell them short, funds that bet exclusively on declines in Japanese stock prices, funds that invest in Japanese convertible bonds, funds that pick over the debt of distressed Japanese companies, and funds that bet on the outcome of mergers, acquisitions and other corporate events.

Foreign investors have shied away from Japanese stocks in recent years because of the long bear market in that country. And the story said that until recently it would have been difficult to construct a diversified portfolio of Japanese hedge funds because most Japanese money invested in hedge funds goes offshore.

But the story said that Japan may now offer more opportunities to exploit pricing inefficiencies than US financial markets, there is less opportunity to profit. "Over the past 18 to 24 months there's been an explosion of hedge funds focused on Japan," said Robert D. White III, a managing director for research and investment at ISA. He said some have been started by Japanese nationals who set out on their own after running money for US or European firms.

In other cases, hedge funds that invest around the world have carved Japan-focused products out of larger portfolios. "Japan is an area no one cared about for years. It's less efficient, so there's potential to generate good return there," White said.