Stefan Nilsson, CEO and founder of HFC Advisory Group, a Tokyo-headquartered alternative investments business, and founder and president of the Hedge Funds Club, Asia's largest network of hedge fund managers and investors. Additionally, he is a co-founder and director of Terrasias Capital, a single family office.
In an interview with Asia Pacific Intelligence, Nilsson explained that the Japan-related hedge fund industry is a relatively large part of the overall Asian hedge fund industry. "In addition to the locally based hedge fund managers in Japan, there are many Japanese hedge funds managed from Singapore and Hong Kong and some run from London and the US" Nilsson said. "It's difficult to put accurate numbers on the Japanese hedge fund industry as there are many different ways of defining what is what and how to count things. Many funds do not report numbers to industry databases. There are also funds based in Japan that trade global strategies and thus don't show up in Japanese or Asian hedge fund indices or databases."
Locally, the hedge fund industry in Japan has two parts to it: one part consists of locally managed hedge funds, which Nilsson says, are mostly relatively small with just a few multi-billion dollar fund managers. "The more significant part consists of local investors investing into hedge funds, not just locally but globally. This amounts to perhaps up to between $1-200bn, which is around 10% of the global hedge fund industry. But again, to get accurate numbers is difficult as many investors classify hedge fund investments in different ways and thus most people underestimate the amount of money invested in hedge funds by Japanese investors".
Nilsson describes Japan as one of the world's biggest hedge fund investor markets. "Most of this money is invested with big global names with long track records. While the major banks and insurance companies in Japan invest in hedge funds and have done for many years, the big growth area is pension funds. Corporate and industry pension funds have already gone in and now we are starting to see some of the big public pension funds looking at hedge funds too. High net worth individuals and other retail investors have been active hedge fund investors for many years but this investor segment has been impacted by poor performance and negative publicity around AIJ and Madoff, etc."
In terms of strategies, Nilsson finds that all do well but the more liquid strategies, such as equity long/short, global macro and CTAs have been popular across the board. "But we have also seen investments into credit strategies, for example" he says.
The hedge fund industry in Japan was rocked last year with the AIJ scandal with managers and investors expressing concern about the implications long term for the industry. Nilsson says: "Most of the victims of this fraud were less sophisticated pension fund investors who had not performed any due diligence on AIJ and neither used any proper professional help. More experienced investors would never have allocated to a manager such as AIJ with its poor set-up and lack of proper external counterparties."
Nilsson believes that the positive impact of the AIJ scandal has been that investors will be more likely to invest in established managers with established local partners promoting their products in Japan, and that fraudsters or fund managers without a proper institutional set-up will now find it increasingly difficult to attract Japanese investments.
This is good news for the Japanese hedge fund industry, Nilsson believes, and observes that the big growth area is investments from pension funds. "While many financial institutions are not making big increases they often keep their existing levels of hedge fund investments steady. Within those portfolios there are plenty of opportunities to win mandates as there is always a certain degree of manager turnover each year. Many of the big banks and insurers in Japan already have multi-billion dollar hedge fund portfolios" Nilsson says.
Restrictions on launching hedge funds in Japan lie with the level of taxation and the cost of compliance. Nilsson says: "Last year we saw some easing of the regulatory requirements which have made it a bit easier and cheaper to set up hedge funds in Japan."
In separate news, the Japanese Government Pension Investment Fund, the largest pension fund in the world, has indicated that it is considering investing in alternatives with the first change to its asset balance,‚ as the new Japanese government's policies could erode the value of $747bn in local bonds.
The $1.16tln Government Pension Investment Fund will start to look at reducing its 67% target allocation to domestic bonds, and may increase holdings in emerging market stocks and start buying alternative assets. In an interview with Asian Venture Capital Journal, Tokihiko Shimizu, director general of the research department and investment policy actuary at GPIF said: "There is a lot of debate in Japan as to whether public pension schemes should start investing in alternatives."
This article was published in Opalesque's Asia Pacific Intelligence our monthly research update on alternative investments in the Asia-Pacific region.