When you take a long position in a Topix future, you'll need to commit between 10-15 percent as margin, which can be done in USD. The entity writing (shorting) the Topix future and selling it to you likely hedges with the underlying Topix500, incurring capital costs. These costs increase your future's cost over the spot price but are usually low as they're borrowed in JPY. Importantly, in this case, the interest charges are more than offset by dividends, giving the future a positive carry during holding. Dividends are earned by the seller of the future and factored into your futures price, reducing your position's cost.
Essentially, you're borrowing in JPY to gain exposure to Topix price rises and its dividends. Be aware of the risks: assumptions about lower interest rates, a weaker yen, and a rising Topix might not hold, potentially leading to a stronger JPY and a decrease in the Topix. This would result in losses, though direct impact from JPY fluctuations is minimal as you're not holding JPY. Profits and losses on the Topix are calculated daily in JPY based on the future's movement, which mirrors the Topix index, and this is the only part with currency exposure.
An important consideration when using derivatives like futures is to base your investment amount on the underlying asset, not just the margin. Using the margin to determine your investment can lead to excessive leverage in your position, magnifying both potential gains and risks.
I hope this information helps. It's always advisable to consult an expert before making investment decisions, especially with complex instruments like futures.
There is DXJ - which is a hedged Japan ETF... what is interesting about this is that shares outstanding soared in 2013, but then collapsed even as it has continued to work... not quite the same - but you don't need a margin account
There is a significant shift happening in Japan. A number of trade unions are pushing for wage increases. Kishida government approval rating at 21%. Change is coming.
I've been examining the TOPIX futures and noted an intriguing characteristic: they trade in backwardation, attributed to the low interest rates and high dividend yields of the included stocks. This could present an advantageous opportunity, especially if the Bank of Japan continues its accommodative monetary policies. Utilizing these futures in Yen also appears to mitigate currency risk effectively, by holding some margin in USD. Do you concur that this represents a savvy approach to gaining long exposure to equities, particularly in a market that, unlike the U.S., is characterized by higher interest rates, elevated valuations, and lower dividends. Maybe this creates a bit of an analogous way of investing like Warren Buffett, who sold a lot of JPY bonds and then bought stocks of Japanese trading houses. Apparently, it was one of the few opportunities he saw in equity.
Thanks Russel! With your knowledge of the Japanese market , do you know if there is something like a Japanese multi strategy hedge fund ? I haven been able to find one.
Is there a way to go long Topix while hedging the exposure into USD, thereby gaining access to the underlying while earning the interest rate spread between USD & JPY?
I'm not an expert in derivatives but would love to put on such a trade, ideally without having to rebalance too much.
I have a feeling that we are going to see many political winds shift in the next year as people around the world have been demonstrably unhappy with their current governments
Nothing wrong with that view... but my view is that the pro-labour policies are sweeping the world, and they will even turn up in Japan at some point. And as this is a political view, it is not easy to time.
I think it is more than that. we have just been through a period of several years around the world where trust in governments and institutions in general has diminished greatly. as this is the middle of the 4th turning, I expect to see a lot of changes from the status quo, regardless of how commodity prices behave, although I am long and think they will go higher
Hello Clement,
When you take a long position in a Topix future, you'll need to commit between 10-15 percent as margin, which can be done in USD. The entity writing (shorting) the Topix future and selling it to you likely hedges with the underlying Topix500, incurring capital costs. These costs increase your future's cost over the spot price but are usually low as they're borrowed in JPY. Importantly, in this case, the interest charges are more than offset by dividends, giving the future a positive carry during holding. Dividends are earned by the seller of the future and factored into your futures price, reducing your position's cost.
Essentially, you're borrowing in JPY to gain exposure to Topix price rises and its dividends. Be aware of the risks: assumptions about lower interest rates, a weaker yen, and a rising Topix might not hold, potentially leading to a stronger JPY and a decrease in the Topix. This would result in losses, though direct impact from JPY fluctuations is minimal as you're not holding JPY. Profits and losses on the Topix are calculated daily in JPY based on the future's movement, which mirrors the Topix index, and this is the only part with currency exposure.
An important consideration when using derivatives like futures is to base your investment amount on the underlying asset, not just the margin. Using the margin to determine your investment can lead to excessive leverage in your position, magnifying both potential gains and risks.
I hope this information helps. It's always advisable to consult an expert before making investment decisions, especially with complex instruments like futures.
There is DXJ - which is a hedged Japan ETF... what is interesting about this is that shares outstanding soared in 2013, but then collapsed even as it has continued to work... not quite the same - but you don't need a margin account
There is a significant shift happening in Japan. A number of trade unions are pushing for wage increases. Kishida government approval rating at 21%. Change is coming.
equity and bond market seem to agree
Hi Russell,
Where are you with respect to opening your fund so that we can invest in your fund rather than reading the tea leaves.
I am also looking forward to your peice on Chanos closing his fund, it does remind me of when J. Robertson closed his fund in year 2000!
Found a structure that works for me - now I need to fund raise. Once money is committed, then 2 months from there. Will keep you informed
I've been examining the TOPIX futures and noted an intriguing characteristic: they trade in backwardation, attributed to the low interest rates and high dividend yields of the included stocks. This could present an advantageous opportunity, especially if the Bank of Japan continues its accommodative monetary policies. Utilizing these futures in Yen also appears to mitigate currency risk effectively, by holding some margin in USD. Do you concur that this represents a savvy approach to gaining long exposure to equities, particularly in a market that, unlike the U.S., is characterized by higher interest rates, elevated valuations, and lower dividends. Maybe this creates a bit of an analogous way of investing like Warren Buffett, who sold a lot of JPY bonds and then bought stocks of Japanese trading houses. Apparently, it was one of the few opportunities he saw in equity.
Yes - makes sense - and just like Warren Buffett. This trade blew up so many times before - but with tariffs now rising, Yen weakness is more likely.
Thanks Russel! With your knowledge of the Japanese market , do you know if there is something like a Japanese multi strategy hedge fund ? I haven been able to find one.
Russell and CorLo
Is there a way to go long Topix while hedging the exposure into USD, thereby gaining access to the underlying while earning the interest rate spread between USD & JPY?
I'm not an expert in derivatives but would love to put on such a trade, ideally without having to rebalance too much.
The approval rate of Japanese PM just hit new low, should we imagine a swift in the future?
*shift
Looking forward to your piece on the Jim Chanos Fund bleeding out and closing.
I have a feeling that we are going to see many political winds shift in the next year as people around the world have been demonstrably unhappy with their current governments
If they can keep commodity prices low, then things probably stay the same I think - but if commodity prices rip - then everything will be up for grabs
I agree
As long as Brent is < $100/bl I don't see the BoJ tightening meaningfully or abandoning YCC
Which means that the Yen remains weak and Topix strong.
Nothing wrong with that view... but my view is that the pro-labour policies are sweeping the world, and they will even turn up in Japan at some point. And as this is a political view, it is not easy to time.
I think it is more than that. we have just been through a period of several years around the world where trust in governments and institutions in general has diminished greatly. as this is the middle of the 4th turning, I expect to see a lot of changes from the status quo, regardless of how commodity prices behave, although I am long and think they will go higher