Japanese corporate pension funds, with about ¥60 trillion in assets, may triple their allocations to alternative assets as they seek to reduce risks and boost returns, according to Credit Suisse Group AG.
Typically, 2 to 5 percent of pension fund assets are in alternative investments including hedge funds, private equity and real estate, and this may grow to about 10 to 15 percent over the next two years, said Benjamin Happ, Hong Kong-based Asia-Pacific head of capital services in Credit Suisse’s prime services division.
“What’s interesting to us right now is how important the institutional investors in Japan are for hedge funds,” Happ said in Tokyo, where the bank held a conference for Japanese institutions and global hedge-fund managers.
“The investor-base in Japan today is the largest and most important group of hedge funds investors in all of Asia and we prioritize it accordingly,” he said.
Credit Suisse, Switzerland’s second-largest bank, has been running a capital introduction business in Japan for more than seven years where it helps hedge funds set up offices and introduces them to potential investors.
Japanese retirement funds face the world’s lowest bond yield and a falling birthrate, which have curbed contributions. Thirty-one percent of 135 retirement funds plan to increase alternative investments such as hedge funds from this fiscal year, which started April 1, according to a JPMorgan Asset Management (Japan) Ltd. survey in May.
Japanese institutional investors including insurers are now favoring single managers over fund-of-hedge-funds as their level of sophistication in the $2 trillion global industry has increased, according to Happ.
Insurance companies that Zurich-based Credit Suisse is working with are planning to redeem the majority of their fund-of-funds exposure and invest in hedge funds directly, Happ said. Single-manager hedge funds may make up about 30 percent of their overall investments in the asset class from 10 to 20 percent now, he said.
By strategy, the highest demand is seen in macro funds, which seek to profit from broad economic trends, multistrategy funds, which invest in everything from equities to commodities, and equity long-short that profit from rising and falling stock prices, Happ said.
“In all three of those strategies, they are looking for managers that have the flexibility and creativity needed to generate profits in a year like 2011, which has been a difficult year for most investors,” he said. “Global hedge funds that are working to grow their presence in Japan need to have a long-term commitment to the investors here.”
Hedge funds have returned 0.4 percent this year through June, according to Eurekahedge Pte., compared with a 4 percent gain by the MSCI World Index. Performances have been weighed by declining stock prices on evidence the global economy may be slowing amid rising sovereign debt concerns in Europe.
The March disaster has also highlighted the need for diversification, Happ said. The temblor sent the Nikkei 225 stock average to its biggest intraday drop since 1987.
“There were concerns that the earthquake and subsequent events surrounding it will dampen the interest-level of Japanese investors in hedge funds, but that has not at all been the case,” he said. “If anything, the events in March have exacerbated or highlighted the need to have portfolios that are more diversified in their construction.”
Development hits low
Property investment fell to a five-year low after some transactions were canceled following the March earthquake, said DTZ Holdings PLC, a real estate brokerage and research firm.
Investments in Japanese properties dropped 87 percent to ¥92 billion in the three months that ended June 30 from the previous quarter, according to London-based DTZ.
The last time the country had lower investments in a three-month period was in the first quarter of 2006, when transactions totaled about ¥55.4 billion, according to Kayoko Hirao, a senior manager in the DTZ consulting and research division.
The earthquake and tsunami prompted Japanese real estate investment trusts, including Invincible Investment Corp. and United Urban Investment Corp., to cancel or delay raising capital for property purchases.
“The drop in the investment volume is due to the Great East Japan Earthquake, as some investors postponed or canceled deals they had planned for, also taking a wait-and-see attitude,” Hirao said Thursday.
“Later in the business year, we may see a recovery in the investment market as investors will have a clearer views on the market, in addition to the improving economy due to the redevelopment demands emerging from the devastated areas.”
The office market remains the most active sector, representing 57 percent of all transactions, followed by mixed-use properties and retail, according to a separate report by DTZ dated July 4. Despite the catastrophe, some investors are still confident about the country’s property market, it said.
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