Japan hedge fund


Asset management in Japan.

1.  Asset management in Japan.

I recently met a very successful hedge fund manager visiting Japan to sell hedge fund investments to Japan's pension funds and institutional investors. I have met with many Japanese financial market people in the past decade, but this was my first contact with Japan's hedge fund industry; the 'racy' end of the Japanese asset management business.

A result of those meetings is this Venture Japan hedge fund section covering the Japan hedge fund and asset management industry. This discussion is not specific to Japan's hedge fund industry so I apologize to hedge fund veterans looking for Japan-specific data. A directory of the Japanese hedge fund and asset management industry will be added in the next few weeks and made into the Japan hedge fund site, so please check back. For those interested in understanding more about hedge funds though, carry on reading.

Because this site is primarily English and open to anyone anywhere, there are a few points that I need to make before starting this discussion. First, I am not at the time of writing in any way involved with any hedge fund either as a salesperson, investor or otherwise and neither have I ever invested in a hedge fund. Second, the SEC and NASD emphasize the following points regarding hedge funds:

  • they are speculative and can involve a high degree of risk,
  • they may be leveraged (i.e. the fund manager borrows cash using the fund's assets as security),
  • their performance can be volatile,
  • investors could lose all or a substantial portion of their investments,
  • the fund manager has absolute and sole control of the fund which means that if you invest in it, your money will be at his/her mercy,
  • there is no secondary market in which an investor can quickly sell his/her hedge fund investments,
  • there may be restrictions on an investor transferring his/her investment in a hedge fund,
  • many hedge funds trade assets in poorly regulated or unregulated exchanges,
  • high management and performance fees can wipe-out a hedge fund's trading profits (especially in a hedge fund of funds where each of the underlying funds has such fees, creating a cumulative effect),
  • hedge funds that operate offshore are often not subject to stringent securities and exchange regulations and, in the event of failure, investors' only recourse may be civil and tort actions (i.e. the SEC will not be inclined to prosecute unless the fund manager clearly infringed SEC regulations, for example by deliberately misleading investors etc.).

So, on to Japan hedge funds. Whether in the US. Europe or Japan, hedge fund is a term that evokes images of wealth, high risk and high volatility in the eyes of layman investors. Maybe because many hedge fund managers operate offshore and beyond the jurisdiction of usual investment regulations, many investors in Japan as elsewhere, perceive rightly or wrongly that the hedge fund is the bad-boy of alternative investments; an expensive highly-strung thoroughbred ready to throw its rider given the slightest opportunity. The hedge fund certainly is an investment vehicle generally accessible only to the affluent (due primarily to regulatory bodies such as the US's SEC restricting direct hedge fund investments to "accredited" affluent investors and institutions) but it is not necessarily a highly strung thoroughbred (although it of course can be); in fact, if the hedge fund were equine it would ideally be a well proportioned hunter able to gallop in good going, turn in an instant and be sure footed in bad weather!

Hedge funds first appeared in the late 1940s and are a form of "alternative investment". In addition to hedge funds, alternative investments include private equity (angel investing, venture capital funds, leveraged buyouts, mezzanine debt financing etc.) and real estate. Unlike other alternative investments, where irrespective of the underlying assets' performance investors' capital may be locked-up for several years before returns can be realized, hedge fund investments can typically be liquidated and returns realized anytime after 1 year. Another advantage is that there is no requirement to commit further capital to a hedge fund "to ensure its success" as is often required by private equity and real estate investments (where underlying assets often have ongoing unpredictable working capital requirements). Additionally, hedge funds do not carry the "all or nothing" high risk typical of angel investing or venture capital - hedge fund managers are typically averse to risk and invest a lot of their time in minimizing (hedging) it - hence the term "hedge fund".

Whether in the US, Europe or Japan hedge fund managers' strategy is to reduce volatility and risk while preserving investors' capital and delivering positive returns under all market conditions. Many hedge fund managers are very experienced and disciplined investment professionals who invest their personal wealth in the hedge funds they manage. This alignment of fund manager and investor interests is a strong indication of a manager's confidence, as is the fact that fund managers' remuneration is usually pegged to the hedge fund's performance. While there is usually a 1% - 2% management fee to cover costs, the fund manager's real incentive (apart from growing his/her personal capital in the fund) is the performance fee, often 20%, charged against the net annual gain of the fund.

Hedge fund returns over time have often outperformed conventional equity and bond indexes, despite the hedge fund's lower volatility.

Compared to managers in the tightly regulated mutual fund (unit trust) industry, hedge fund managers have a wide range of investment options and tactics at their disposal to achieve the required returns. They can can use arbitrage, buy and sell undervalued securities, take long and short positions, trade options, bonds and currencies, and invest in opportunities in a wide variety of markets, including other hedge fund investments, where they see substantial returns with relatively low risk. Due to the wide range of investment strategies available to the manager, a hedge fund's performance is often unrelated to the direction of equity and bond markets, whereas traditional direct equity investing or mutual funds are invariably linked to prevailing market risks.

Hedge fund returns over a sustained period of time, have often outperformed conventional equity and bond indexes, despite the hedge fund's lower volatility and lower risk of loss. For pension funds, financial institutions and high net worth individuals in the US, Europe and Japan hedge fund investments are increasingly used to minimize overall portfolio volatility, reduce correlation to bond and stock markets and realize consistent long-term growth.

The industry is growing at about 20% per year with around 8,400 funds currently under active management.

2.  low volatility hedge fund strategies >>

Japan hedge fund

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