The problems now dogging J.C. Whitney & Co.’s Japanese hedge funds may have some wondering whether the New Canaan, Conn.-based firm barked up the wrong investment tree. After recording 40% and 65% growth last year for its Whitney New Japan Fund and Whitney Japan Select Fund, reports The Wall Street Journal, the two offerings have suffered losses of 23% and 29%, respectively, this year as of July 31. Observers blame heavy investment in small- and mid-cap stocks, which took a major hit following the insider-trading investigation involving Livedoor Co. “What happened this year globally is that we’ve entered a flight-to-quality environment,” James Fiorillo of Ottoman Capital, a hedge fund advisory that focuses on Japan, said in a Journal interview. It’s not only the choice of stocks that are to blame. In Japan, hedge funds work more like mutual funds, so they don’t offset risk by selling short as they do in the U.S. This has all left a bitter taste in the mouth of Japanese investors, according to a prime broker, and some hedge funds may close as a result of a dried-up fund flow. Whitney may have a particular tough line to toe. According to the Journal, the way the firm is structured, it won’t be able to charge its 20% performance fees until it recoups all the losses.