Global hedge funds are vying for allocations from Japan's corporate pension fund managers, who oversee about $740 billion and are seeking alternatives to stocks following the March earthquake.
Prosperity Capital Management, the largest manager of Russia-focused funds with about $5 billion in assets, plans to open an office in Tokyo in August. Van Biema Value Partners LLC, a New York-based hedge fund of funds with about $800 million in assets, is targeting Japanese pension plans by offering funds that buy securities seen as inexpensive relative to the market.
Japanese pension funds are redoubling their quest to offset the world's lowest bond yield and a falling birthrate, which have curbed contributions, after the March 11 temblor sent the benchmark Nikkei 225 to its biggest intraday drop since 1987. Thirty-one percent of 135 retirement funds plan to increase alternative investments from this fiscal year starting April 1, according to a J.P. Morgan Asset Management (Japan) Ltd. survey in May.
“After the earthquake, there has been strong emphasis on gaining exposure to investments outside Japan, both for pure diversification reasons and to try to achieve higher returns,” said Michael van Biema, the founder of Van Biema Value Partners. “The big problem is that most of the large pensions still have about 60% of their money in Japanese government bonds. You just can't earn a reasonable rate of return doing that.”
Of 215 Japanese pension funds in a Daiwa Institute of Research Survey, more than 26% — the most since 2005 — said they planned to make additional investments in alternative asset classes, including hedge funds. The expected increase in allocations comes after Japanese pension funds shifted to single managers from hedge funds of funds that suffered from poor returns following the collapse of Lehman Brothers Holdings Inc. in September 2008.
Among those seeking Japan's institutional money, D.E. Shaw & Co., the $20 billion hedge fund founded by David Shaw, opened an office in Tokyo in September 2010. Robeco Group, the Dutch money manager owned by Rabobank Groep NV, wants to double assets from Japanese pension plans over two years with alternative investments including managed futures strategies, Tetsuya Tanaka, senior executive advisory of the firm's Japan unit said in a telephone interview on June 13.
Hathersage Capital Management LLC, a New York currency hedge fund, has teamed up with Tokyo-based KTOs Capital Management LLC to help Japanese pension funds hedge against a strengthening yen. Brevan Howard Asset Management LLP, with $32.6 billion under management, is offering its managed futures funds to Japanese funds as well.
The Nikkei fell as much as 14% immediately after the quake, but has trimmed its loss to 7.5% since March 10.
“Having had the investments in the managed futures fund helped limit losses from the downturn in the stock markets after the quake,” said Yukou Takahashi, the adviser of the ¥13 billion ($160.73 million) pension fund at Tobu Group, which has invested in managed futures funds including one run by Brevan Howard. “We want to lower the risk of our equity investments and we picked macro funds because they have low correlation to stocks.”
Alternative investments, which can include real estate and infrastructure, now account for 12% of the pension fund's total portfolio from 8% two years ago, said Mr. Takahashi. Tobu Group includes Tobu Railway Co. and Tobu Store Co.
The U.S. represents more than 60% of all pension fund assets in hedge funds, while Europe accounts for 29% and Japan only 1.75%, according to London-based research firm Preqin Ltd.
Japan has the world's second-biggest pension market with assets of $3.47 trillion after the U.S. with $15.27 trillion, according to Towers Watson & Co.'s 2011 Global Pension Asset Study. Of the Japanese total, more than ¥60 trillion is in corporate pension plans, according to Daiwa Institute.
Prosperity Capital is bringing to Japan its Russian Prosperity Fund that invests solely in Russian equities and employs a “friendly activist” strategy by trying to maximize the value of the firms in which it invests, said Tomas Olsson, a partner who will become the Asia-Pacific chief representative based in Tokyo later this year.
The fund has had an annualized return of 26% since inception in 1996, according to the firm. Japanese clients, including high-net-worth investors and some pensions, account for 5% of Prosperity's investor base, according to Mr. Olsson. The firm started to approach pension funds in November, he said.
“Not only for us, but for other hedge funds, Japan is still a great opportunity because most portfolios have such a low level of diversification outside of developed countries,” Mr. Olsson said.
Japanese managers now account for about 3.5% of the Asia portfolio of van Biema and the firm plans to increase that to about 10% to 13% over the coming months, said Mr. van Biema. The van Biema Asia Value Fund Ltd., which invests in Asian hedge funds, has had a net annualized return of about 20% since inception in August 2008, according to a letter to investors.
Reech AIM Group, the European alternative asset management group founded by Christophe Reech, is also looking to attract Japanese investors by offering its so-called CTA strategy that uses computer systems to invest solely in exchanged-traded futures, said Philip Catmur, the London-based partner of the strategy. The offering, which has $85 million, does not yet have Japanese investors, he said.
The Rochester Fund Ltd. has had annualized return of 13.1% since inception in November 2002 through, according to a letter to investors.
“Japanese pension funds and investors are becoming much more aware of the risks in their portfolios,” Mr. Catmur, who was formerly the deputy head of international fixed income at Tokyo Mitsubishi International in London, said in an interview in Tokyo. “Japan is obviously a big market, but it's also a sophisticated market — their understanding of the benefits of the CTAs and which CTAs will achieve their objectives.”
The company's executives have made three trips to Japan this year as a sign of “our commitment to the region,” he said.
The planned increase in allocations to alternative assets was the biggest among 10 investment options, according to the J.P. Morgan Asset survey.
“Some of them will likely accelerate diversifying their assets after the quake as they recognized the risks of investing in Japanese equities,” said Hidenori Suzuki, the head of the strategic advisory group at J.P. Morgan Asset in Tokyo.
Japanese pensions' focus on steady returns makes them a less demanding group of investors for overseas funds, said Akira Takahashi, the head of Credit Suisse Securities (Japan) Ltd.'s asset management group in Tokyo.
“Overseas investors tend to expect double-digit returns from hedge funds, but Japanese pensions are more focused on stable returns and some as low as 3% to 5%,” he said. “From the hedge-fund's point of view, it's important for them to diversify their investor base because they are now in an environment where money isn't automatically flowing in.”
Japanese hedge funds returned 0.7% this year through May, compared with a 1.6% gain by the global hedge-fund index, according to Eurekahedge Pte. Assets stood at $16 billion at the end of May, compared with the peak of $39 billion in April 2006, according to the Singapore-based data provider.
Global hedge fund assets were $1.82 trillion in May, below the $1.95 trillion peak in June 2008, according to Eurekahedge.
“We're seeing Japanese pensions that have never invested in hedge funds looking to do so and the catastrophe is giving them more reason to seek assets with better returns,” said Yasuo Sugeno, a senior analyst at Daiwa Institute in Tokyo.
