16/02/2011 Author: Gwyn Roberts

Big in Japan

While Japanese managers experienced then same flat start to the year as their western peers, investors in this densely populated country are beginning, once again, to see the upside of hedge funds

For the Japanese, April is traditionally a month of beginnings. Young children start school, old salarymen move to new roles and the government’s fiscal year commences. In 2011, many western hedge funds are also hoping for a fresh start in the east, as Nippon’s institutional investors consider fresh allocations.

The renewed focus from the land of the rising sun, and perennially uneven stock market, follows a hiatus. Post-Lehman, and even before the banking crisis, Japanese investors pulled out of hedge funds with alarming alacrity. They have taken a little longer to return, but, according to industry sources, are now investigating the space as they look to diversify and combat a growing pensions’ deficit.

Managers are eager to make the most out of this revived interest. Last week saw UK fund of hedge funds (FoHF) Hermes BPK make plans to increase assets, partly due to fresh Japanese interest, to $5bn; while fellow $1.7bn FoHF, Signet, told HFMWeek of its own strategy to forge a distribution deal with a Japanese partner.

The 1 April, a day of new beginnings, and a time when many investors review their portfolios, will be a crucial date for hopeful funds. Currently, Martin Visairas, head of capital introduction - Asia Pacific, at Citi, describes an upswing in interest, particularly from institutional investors, but little real investment.

“We are seeing a lot more enquiries,” he confirms, “but nothing much will happen until the new Japanese fiscal year. But it does feel like the clean-up of portfolios that took place after 2008 is finished, and investors are getting ready to allocate new money into the asset class.”

Signet, whose flagship fund is a $700m fixed income FoHF, is one firm hoping to take advantage of this increase in interest. Timothy Gardner, the firm’s global head of sales and marketing, is re-engaging with Japan after an early interest in the country’s institutional investors was stymied by the events of 2008.

“When the storm arrived, we battened down the hatches and focused on the existing client base,” he starts. “Fast forward to a year ago and we started laying out our global marketing plan again. As part of this, we believe that Japan is a market where there are several opportunities.”

However, before European, and US, managers can take advantage of these “opportunities”, they must negotiate local funds law. Accessing Japan remains difficult, and although the national regulator allows products to be distributed as securities, gaining the relevant licence to market a hedge fund is labyrinthine and can take up to 12 months.

“There are basically two licensing types,” says Paul Smith, chief executive of Hong Kong-based consultancy Triple A Partners, “you can either be set up to attack pension plans through a discretionary investment management licence, or you can be licensed as a securities company in Japan.”

Depending on the grade of the latter, managers can be permitted to deal with just financial institutions, or the retail public.  However, a third option also exists, and, as Smith explains, many managers eschew the need for a licence, by building a relationship with a local distributor.

“Instead,” he says, “they hunt for a securities company that is already licensed, with a distribution network, and seek to persuade that company to pick up that product as something they will distribute on their behalf.”

Signet is pursuing this partnership approach and has hired an introducing agent, in an attempt to find the right distributor. “After our first experience, where we marketed without local help,” says Gardner, “it was overwhelmingly decided that we needed some kind of local presence, an introducer that would help us find a fully licensed distributor.”

Out of those funds set up to distribute, Visairas believes the strategies that stand the best chance of allocations will be relatively simple, with liquidity a must. “A small number of investors are looking to capture the big trends of the emerging markets, but most are looking at plain vanilla, long/short types of strategies. Liquidity matters at the moment in Japan and that is one of the trends we are seeing – investors are a lot more cautious about locking in their money,” he says.

Caution may control the rules of engagement, but as the countdown to April begins, Japanese investors do seem to be clocking up the air miles in pursuit of the right managers. This week, HFMWeek reported that the ¥51.5bn ($623m) pension fund for Japanese manufacturing firm Nitto Denko was planning to boost its hedge fund allocations over the year.

Other investors are also looking. Cap intro teams at a number of prime brokers have told HFMWeek that Japan’s $110bn Pension Fund Association, one of the country’s most influential government-backed institutional investors, arrived in London last week to conduct meetings with hedge fund managers, before a possible review of its portfolio.
With Smith and Visairas hopeful of more concrete investment after April, the month of new beginnings bodes well. But despite the promise, and the interest, Japanese investors will follow their historical norm – allocating with care, conservatism and only to those managers that show extreme caution.