Japanese pension plans, reeling from a 12-year bear market, are turning to hedge funds in a desperate attempt to find positive returns.
About Y1.2 trillion (US$10 billion) are said to be invested in hedge funds by Japanese investors. The major investors now are life insurance companies and regional banks, with pension funds just starting to make major moves into the area.
Sumitomo Trust & Banking Co., Tokyo, saw a near doubling of assets in hedge fund investments last year, to Y105 billion, with approximately Y67 billion coming from pension funds, said Katsutoshi Endo, senior manager in the pension investment department.
The Japanese corporate pension funds that invest in hedge funds include:
* Bridgestone Corp., Tokyo, whose $1.7 billion pension fund has at least $12 million invested in hedge funds;
* AISIN Corp., Tokyo, whose $1.3 billion pension fund has at least $11.7 million invested;
* KDDI Corp., Tokyo, whose $1.06 billion pension fund has at least $4.2 million invested in hedge funds;
* The Japan Travel Bureau, Tokyo, which has $156 million, 11% of its total pension fund, invested in hedge funds;
* Mitsubishi Corp., Tokyo, which has 20% of its $2.5 billion pension fund allocated to hedge funds;
* Hitachi Corp., Tokyo, which has 1% of its $8 billion pension fund invested in hedge funds;
* JGC Corp., Tokyo, which has $8 million of its $191 million pension fund invested in hedge funds; and
* East Japan Stationery Sales, Tokyo which has 20% of its $448 million pension fund allocated to hedge funds.
Funds of funds
Japanese pension funds generally use funds of funds more than direct investment, according to Mr. Endo. "Japanese pension funds tend to want to have an overall investment adviser/gatekeeper of gatekeepers, especially in hedge funds investing," he said.
Japanese pension funds prefer hedge funds with "moderate risk-return profiles, because the main reason to invest in hedge funds is to avoid downside risk," he added.
The Bridgestone, KDDI and AISIN Corp. pension funds are all invested in Sumitomo's hedge fund of hedge funds, which uses a diversified investment style.
The $1.4 billion Japan Travel Bureau pension fund has $62 million invested in funds of funds run by two U.S.-based money managers whom Noboru Yamaguchi, head of the pension fund, declined to name. One fund is used as an alternative investment for international equity; the other is used as an alternative to Japanese equity and is fully hedged into yen, Mr. Yamaguchi said.
JTB also has $56 million in market-neutral funds invested in Japanese equities and run by two U.S.-based passive investment managers, said Mr. Yamaguchi. They are used as an alternative to fixed-income investments. "Their expected return is higher than fixed income and their risk is lower," said Mr. Yamaguchi.
The JTB fund also has $25 million invested in long-short international equity funds managed by two active European money managers. The investments are made globally and are fully hedged back into yen, said Mr. Yamaguchi. They are used as an alternative for Japanese equity. And, JTB has $12 million invested in a hedge fund specializing in investment in international foreign exchange and the interest rate market.
Mr. Yamaguchi said the JTB fund invests in hedge funds to get more diversification to minimize the volatility of its portfolio and because hedge funds have low or negative correlation with traditional asset classes.
Invests in both
The Mitsubishi pension fund invests in both individual hedge funds and funds of funds, said Daisuke Hamaguchi, chief investment officer. He said the strategies the fund uses "are fairly diversified, including almost all the strategies used by hedge funds, resulting in a portfolio of low risk because of diversification." He declined to name specific strategies.
The Mitsubishi fund uses hedge fund managers based in the United States, Europe and Japan, whom he declined to name.
Hiroshi Maruta, president of Hitachi Investment Management, which manages the Hitachi Corp. pension fund, said the fund uses both regular hedge funds and funds of funds. Hitachi made its first hedge fund investments in 2002. He said one reason he likes hedge funds is their "very low" correlation to stock and bond investments.
Hitachi invests in long-short and arbitrage-event-related hedge funds. "We need low risk, and these hedge funds are low risk," said Mr. Maruta. He said the fund uses Japanese and European hedge fund managers, whom he declined to name.
JGC Corp.'s hedge fund investments are invested in individual U.S.-based hedge funds that use convertible bond arbitrage, according to CIO Akira Kunoh. One of the fund's investments is in JGC is invested in the Salomon Smith Barney Capital Structure Arbitrage fund.
With Japanese pension plans turning to hedge funds, U.S.-based money managers are working hard to get in on the action.
Koji Yamamoto, president and representative director of State Street Global Advisors (Japan) Ltd., Tokyo, said the firm has six Japanese corporate pension fund clients, with a total of about $100 million invested in its Japanese equity long/short market-neutral hedge fund. He wouldn't name any clients.
Citigroup Asset Management, New York, has been marketing hedge funds in Japan for three years and now has around $750 million of institutional money in its arbitrage hedge fund, about half of it from pension funds, according to Ross Margolies, managing director of Citigroup Alternative Investments. He wouldn't name any clients.
Takuma Yoshida, who runs the hedge fund operations in Deutsche Asset Management's Tokyo office, said a lot of pension funds in Japan are showing interest in absolute-return strategies. Deutsche's clients like long-short and market-neutral strategies.
Deutsche launched a fund of hedge funds in August that now has about $70 million from five institutional clients in Japan; Mr. Yoshida would not identify the clients. He said the firm's goal is to raise $1 billion for hedge fund investments over the next three years, with about half of the money coming from Japanese pension funds.
