Underperforming stocks and recent yen fluctuations are helping rekindle new talk of hedge funds in Japan. A mainstay of alternative investment elsewhere, investor caution and the local aversion to alternatives in general continue to ensure their increase here is at best gradual. But it's no wonder there's at least more talk.
In the past five years, the number of hedge funds in Japan has tripled to 270, with assets that have more than doubled to about 4.17 trillion yen (US$36 billion). This according to Bloomberg, which also notes that newly licensed investment advisory firms, often the first step to starting hedge funds in Japan (especially when domiciled overseas), totaled 148 in July - the most in a decade.
These private mostly unregulated pools of capital for institutions and wealthy investors have a greater appeal in Japan these days for several reasons. Not least of which is, it is said, a dismal stock market for the past three years that has investors looking for better returns. Similarly, as the recent carry-trade boom has shown, the proverbial Mrs. (and Mr.) Watanabe wants a better yield on the nation's 1,400 trillion yen worth of personal savings than Japanese banks, with the developed world's lowest interest rates, have to offer.
Add to that the impact this graying nation is expected to have on pension payout timelines and its clear why insurance firms and corporate pension plans began diversifying in hedge funds a few years ago (albeit most with no more than 3 percent of their assets). Some advocates even call on the government - perhaps overoptimistically - to take a clue from its Western counterparts and use hedge funds to shore up the flagging state pension system.
Indeed, much of the buzz about hedging the nation's future financial bets on hedge funds makes sense. All of it, however, is not as rosy as it may seem at first glance. For starters, despite the gradual growth of hedge funds in Japan, they still lag when compared to the global market.
Eurekahedge's Japan Hedge Fund Index has slipped 0.4 percent monthly from December 2005 to July 31, while the Singapore-based researcher's Global Absolute Return Fund Index shows a 38 percent gain for that period. And the same lackluster Nikkei and Topix stocks heralded by some as an incentive for alternative investment are what others point to as a prime cause for the inability of Japanese hedge funds perform better or attract more local investors.
Japan's prime brokerage market, whose players offer hedge-fund clearing, custody, securities and other services, quadrupled its assets in the past four years, according to AsiaHedge. But Japan's share of the regional market by assets fell from 22.3 percent in 2003 to 12.6 percent this year. Meanwhile, hedge-fund-managed assets in Hong Kong, China and Singapore surged nearly 15-fold to account for 28 percent of the region's total, according to a recent Bloomberg report. And like regional stock markets, which in the past year welcomed China, India, Australia and South Korea to the ranks of those valued in excess of US$1 trillion, the competition is heating up - while Japan has only warmed up to hedge funds, at best.
"The Asia-Pacific hedge-fund industry continues to develop at breakneck speed, with more mega-launches than ever before already this year," Euromoney Books says of the region's more than US$150 billion hedge-fund industry. "Yet at the same time, factors such as lackluster performance and intensifying competition are focusing investors' minds as never before when they search for where to find the highest-quality returns." As top players gear up for the annual AsiaHedge Forum in Hong Kong this October, Euromoney notes it will focus on "going mainstream," but adds, "However, the leading topic in 2007 is most likely to be performance."
