Global hedge funds gain after AIJ rattles Japanese pension market

Global hedge funds are adding Japanese assets after local manager AIJ Investment Advisors Co. unnerved the retirement market by seeking to hide $1 billion in losses from its pension fund clients.

Neuberger Berman Group LLC is winning new mandates to the $4 billion it has gathered in Japan since 2004. Winton Capital Management Ltd., with about $3 billion from Japanese investors, is seeing steady inflows, while Financial Risk Management Ltd. is starting a new fund to meet growing interest.

“We have seen an increase in inquiries from our clients, including Japanese pensions,” said Motoyuki Sato, who runs one of FRM's hedge funds of funds. “It is unfortunate some pension funds had invested in AIJ, but it seems that they are still looking at alternative investments, including equity long-short products, as a way to diversify.”

Japanese pension funds oversee $3.36 trillion, the world's second-largest pool of retirement assets, according to Towers Watson & Co. They are pumping more money into alternative investments such as hedge funds in a bid to cope with domestic bond yields that are among the world's lowest, two decades of slumping stocks and a rapidly aging population. Twenty-one percent of Japanese retirement funds plan to boost alternative investments in the fiscal year started April 1, the most among 10 asset classes, a May survey by J.P. Morgan Chase & Co. showed.

AIJ President Kazuhiko Asakawa was arrested Monday on suspicion of fraud, Kyodo News reported. Mr. Asakawa admitted in parliamentary testimonies earlier this year to disguising the losses, adding he didn't intend to lie to clients.

The Eurekahedge Hedge Fund index, tracking more than 2,700 funds globally, has topped the Nikkei 225 Stock average every year since 2006. The hedge fund index is up 1.8% this year through May, compared with the Nikkei's 1% advance, while Japan's sovereign bonds returned 1.4%, according to Bank of America Corp.'s Merrill Lynch index.

AIJ, based in Tokyo, managed ¥145.8 billion ($1.8 billion) of clients' money and lost ¥109.2 billion from derivatives trades over nine years, the Securities and Exchange Surveillance Commission said March 23. The fallout, after the financial watchdog ordered the firm to suspend operations in February, led to Japan's biggest review of the fund industry and retirement funds' investment practices.

The Ministry of Health, Labor and Welfare, which oversees the pension industry, plans a new set of guidelines to prevent a similar scandal by the end of June. Proposed measures include limits on allocations to single managers; some pension funds had invested more than half their assets with AIJ, a draft report by the ministry showed.

“The Japanese pension market is showing a greater receptivity to foreign funds,” said Eric Weinstein, chief investment officer of Neuberger Berman's hedge fund-of-funds business in New York. “This increased receptivity gives pension funds a broader set of investment choices, so they will be better able to achieve their investment objectives.”

Neuberger Berman continued to win hedge fund investment mandates from Japanese investors following AIJ, he said. The New York-based investment company had about $193 billion under management as of Dec. 31.

About half of Japan's pension assets are managed by local trust banks, according to Hidenori Suzuki, head of the strategic advisory group at J.P. Morgan Asset Management (Japan) Ltd. in Tokyo. The nation's insurers and asset managers handle about a quarter, while foreign institutions oversee the rest. About 80% of hedge fund investments by pension funds are managed by foreign firms, he said.

Alternative investments, including hedge funds and real estate, accounted for 9.7% of Japanese pension fund assets as of March 2012, according to the J.P. Morgan survey. That compares with 7.1% in March 2009. The average assets managed by Japanese hedge funds are estimated at $71 million, compared with $257 million by North American managers and a global average of $174 million, according to Eurekahedge Pte, a Singapore-based data provider.

Pension funds are becoming more selective, choosing larger international managers with proven track records as a result of the AIJ scandal, said Jiro Shimpo, director of alternative investment consulting for Japan and Northeast Asia at Russell Investments in Tokyo.

“There is a natural preference for bigger, more established funds, more as a process of elimination,” he said. “We're seeing many European managers visit, seeking to entice Japanese pensions.”