AIJ Investment Advisors, suspended by Japan’s financial regulator, told investors one of its funds returned 241% since it started in May 2002 by mainly trading Nikkei 225 options, according to a newsletter obtained by Bloomberg News.
The Financial Services Agency on Feb. 24 ordered the Tokyo-based firm with ¥183.2 billion ($2.3 billion) of client money to stop business for a month as the regulator investigates possible losses at AIJ’s funds.
The return of AIJ’s AIM Millennium fund since inception compares with a 22% drop by the benchmark Topix index and a 16% gain by the Nomura BPI benchmark for domestic bonds during the same period, according to the four-page newsletter, issued in October.
Alternative investment managers that eschew traditional investments such as stocks, bonds and cash have come under scrutiny in the past four years, since the collapse of hedge funds run by Bear Stearns in 2007. Bernard Madoff was arrested in 2008 for operating the largest Ponzi scheme in U.S. history and hedge fund Galleon Group co-founder Raj Rajaratnam was found guilty in May on insider-trading charges.
“The similarity in the Madoff situation and the AIJ situation is not necessarily the investment strategy, but the excessive degree of trust both fund managers inspired in people similar to themselves,” said Frank Packard, president of Triple A Partners Japan, a Tokyo-based investment manager and adviser regarding hedge funds. “The strategies at both firms seem to promise high returns; in fact, both appear to have been bogus.”
Regulators have been investigating AIJ since the end of January, and discovered the company has been unable to explain to investors the current state of how their money is being managed, according to the FSA.
“This is a so-called alternative investment fund and unlike traditional assets such as equities and bonds, the aim is to secure absolute returns regardless of the market directions,” the newsletter said. It noted the strategy is able to provide stable returns even when bond and stock markets drop and that the fund was no longer taking in new investments.
Japan’s hedge fund industry has more than halved to $16.1 billion under management, down from a peak of $39 billion in 2006, and compares with $109 billion managed by funds in Asia outside of Japan, according to Eurekahedge, a data provider. Japan-focused hedge funds lost 4.1% in 2011 as global peers suffered their second-worst year on record amid Europe’s sovereign debt crisis and concerns of an economic slowdown worldwide.
AIJ, led by Kazuhiko Asakawa, was established in April 1989 and had 120 clients, including pension plans, with ¥183.2 billion in assets as of the end of 2010, according to a statement from the FSA. Phone calls to AIJ’s main office were answered by an automatic recording that didn’t allow messages to be recorded.
The newsletter cited ITM Securities as the distributor of the fund. Yasuo Tsuneyoshi at ITM’s planning department, said the firm sold AIJ’s funds to pensions, declining to further comment until the investigation is completed.
AIJ also listed two other funds in the newsletter, with returns of 32% and 22% since inception. The funds were based in the Cayman Islands, according to the newsletter, which provided monthly and annual returns on AIJ’s funds.
Among corporate pension plans that put money with AIJ are Advantest Corp., a maker of memory-chip testers, and Yaskawa Electric Corp.
“Everybody needs to do their homework and correct due diligence” regardless of who they’re investing with, said Triple A Partners’ Mr. Packard. “This should be a wake-up call to the fiduciary responsibilities, both for regulators and investment managers.”