ANOTHER ALTERNATIVE TO PERSONAL SAVINGS

Hedge fund numbers, assets mushroom as stocks languish

by Tomoko Yamazaki

Bloomberg

Hiromichi Tsuyukubo ran the best-performing fund in Japan at Mitsubishi UFJ Asset Management Co., an arm of the nation’s biggest lender. Then, after six years, he decided to join a hedge fund.

“Back at my old job, I couldn’t protect my clients’ money with all the investment restrictions,” said Tsuyukubo, 48, who joined Tokyo-based Myojo Asset Management Japan Co. last year. “With the new job, I could start from scratch as to how I will manage the fund. That’s a big reward.”

The number of hedge funds in Japan has in five years tripled to 270. Assets have more than doubled, to $36 billion, in the same period. Investors are seeking returns better than Japanese stocks, which have underperformed global shares over the past three years.

As in the U.S., hedge funds are private, largely unregulated pools of capital that cater to wealthy individuals with a minimum $700,000 to invest, and institutions. Managers can buy and sell any assets and participate in the profits.

Japanese hedge funds will see only a limited impact from the global credit crunch that has roiled stock markets worldwide and led to the collapse of two Bear Stearns Cos. hedge funds, said Kirby Daley, who advises investors at Societe Generale SA’s Fimat unit in Hong Kong.

Most Japanese hedge funds have not invested in debt, Daley said. The two Bear Stearns funds that collapsed had invested in home loans to Americans with poor credit histories.

“The funds that have imploded to this point have largely been credit funds that had large short exposure, or direct exposure to subprime loan derivatives on the long side,” Daley said. “Japanese hedge funds tend to be equity long-short funds.”

A short sale involves selling a borrowed security in anticipation of making a profit and paying for it by buying it back when the price has fallen.

Even so, the performance of Japanese hedge funds has lagged global rivals. The Eurekahedge Japan Hedge Fund Index has declined 0.4 percent on a monthly basis since December 2005, through July 31. That compares with a 38 percent gain in the Eurekahedge Global Absolute Return Fund Index.

The Tokyo Stock Exchange’s Topix index had its biggest weekly drop since the end of the asset inflation bubble of the 1980s in the five days to Aug. 17. The Nikkei average is down 5.4 percent for the year. The Standard & Poor’s 500 Index is up 4.3 percent in 2007, while Europe’s Dow Jones Stoxx 600 Index has added 1.8 percent.

The number of investment advisory firms that obtained governmental licenses reached 148 in July, the most in a decade, according to the Japan Securities Investment Advisers Association.

The first step toward setting up hedge funds in Japan is often creating such a firm, especially in cases where the hedge fund itself is domiciled overseas.

Tsuyukubo’s hedge fund, Myojo Riodas Master Fund, in June was ranked the best performer among 58 investing in Japan by AsiaHedge, a financial information provider.

Myojo Riodas returned 13 percent this year as of the end of July. Its assets have ballooned to ¥3.7 billion from ¥200 million at the inception in August 2006.

Takanori Shimizu, former chief investment officer at Nomura Asset Management Co. and manager of Japan’s biggest fund, left in 2005, after more than three decades, to set up his own company. Toru Ueda left PCA Asset Management Co. in 2004 and founded Tokyo-based TY Advisers.

Jesper Koll, chief economist at Merrill Lynch & Co. in Tokyo, and one of the best-known foreign commentators on Japan’s economy, joined Tantallon Capital Advisors Pte., a Singapore-based hedge fund, as president of its new Tokyo office in June. People are doing this because they “want to do things that big institutions don’t let them do,” Koll said. “You have many more individual players who do different things and that’s fantastic and stabilizing for the market.”

The approximately 270 hedge funds in Japan are managed by 155 managers with an estimated $36 billion in assets, according to Eurekahedge, a Singapore-based hedge-fund research and publishing company. In 2002, there were 90 such funds, with less than $15 billion in assets.

In North America, there are 4,777 hedge funds with assets under management of $902 billion, while in Europe, 2,051 hedge funds handle $448 billion, according to Eurekahedge.

Japanese hedge funds stand to benefit as investors are starting to look for places to put more of the nation’s ¥1.4 quadrillion in personal savings. Most of that money has been held in bank accounts, even as lenders offered the lowest interest rates among developed nations.

Nikko Asset Management Co., Citigroup Inc.’s Japanese funds unit, raised ¥9.1 billion in July for the first hedge fund it will sell to individual investors in the country.

Japan had the world’s highest ratio of people over 65, at 21 percent of the population in 2005, according to the latest census figures.

Even so, Japan has pitfalls for managers setting up hedge funds.

Only life insurers and trust banks can lend shares for short sales, Shimizu said, reducing the supply available for hedge funds to borrow. In the U.S., public pension funds are allowed to lend stocks for short sale. In addition, Japanese stocks have lagged global equities over the past 18 months, making it difficult for hedge funds to keep up their performance and attract new investors.

Both the Nikkei and the Topix have returned less than the 29 percent advance in the Morgan Stanley Capital International World Index during the same period.

“It has been fun but extremely difficult and stressful,” said James Fiorillo, a former bank analyst at Commerz Securities (Japan) Co. and ING Groep NV, who set up Tokyo-based hedge fund advisory firm Ottoman Capital in 2005. “This market has not been very value-friendly over the last year and a half.”

In addition, the global credit shortage may further deter traditionally risk-averse Japanese from investing in hedge funds, said Daley. The Eurekahedge Japan Hedge Fund Index dropped 0.4 percent in July as the Nikkei and the Topix had their worst month since May 2006. The Eurekahedge global index rose 0.3 percent.

Shimizu, former fund manager of Big Project N, Japan’s biggest actively managed fund, set up 21st Century Asset Management and now manages four hedge funds. The largest is Global Macro Open Fund, based in the Cayman Islands, which invests in global bonds, currencies, stocks and commodities.

The $750 million Global Macro fund has returned 31 percent as of July 17 since its inception on June 17, 2005.

“You have to be nuts to think you can make steady returns on long-only investments,” Shimizu, 62, said. “Investing means to make returns, and in order to make returns you have to take risks.”