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By Jay B. Gould jay.gould@pillsburylaw, William R. Huss from Pillsbury Winthrop Shaw Pittman LLP: While U.S.-focused hedge funds struggled for much of 2005, hedge funds focused on certain Asian strategies posted record performance numbers last year. Specifically, the rising tide in Japan, evidenced by the approximately 20% increase in the benchmark Nikkei 225 Index, produced returns in the 30% to 40% range by certain Japanese equity long-short hedge fund managers. With such a performance disparity to the U.S. markets, it was inevitable that U.S. institutional investors would flock to the region – and they have. It is estimated that as much as $20-$25 billion on an annualized basis is now flowing into local Japanese hedge funds; much of it from U.S. fund of funds, pension funds, and other institutional investors. Japanese and other Asian-based hedge fund managers understand that there is a renewed interest in Asia and have become more aggressive in their marketing efforts towards U.S.-based investors.

This cross-border allocation of capital has numerous implications under the securities laws and market practices of both countries, many of which are not readily apparent and only recently beginning to be understood by the industry and those who provide advice to it. As a result of the somewhat unusual structure of Japanese hedge funds that must be employed in order to avoid “permanent establishment” issues under the Japanese tax ......................

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