Japan's Financial Services Agency (FSA) said on Tuesday it will begin monitoring hedge funds operating in Japan, seeking to ward off potential turmoil in financial markets.
The regulator will ask hedge funds filing with it from around September to report their assets under management on an annual basis.
"We basically want to understand who are the main funds operating in Japan," said Mitsuhiro Kawamoto, deputy director of the Securities Business Division of the FSA's Supervisory Bureau.
Hedge funds investing in Japan, which have about $36 billion under management, have been performing poorly of late because of a slide in small companies' share prices.
Most hedge funds in Japan follow a similar strategy, buying small-cap stocks and shorting more liquid larger-cap shares, so when prices move against them they may sell and at the same time exacerbate falls in prices.
The Mothers' market for start-ups has fallen 16.4% this year and lost 56% in 2006. Singapore-based research firm Eurekahedge's index of Japanese hedge funds was down 3.4% in 2006 and is up 1.3% in the year to date.
The fact that hedge funds are adopting similar strategies has also worried the Bank of Japan (BOJ) because it could represent a risk to the stability of financial markets.
The central bank is concerned that if a large fund ran into trouble, as happened to Amaranth Advisors LLC when the U.S. fund lost $6 billion in energy trades last September, then a ripple effect could engulf other markets.
The BOJ called repeatedly for more diversification of strategies last year.