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Japan Pensions Bet on Hedge Funds
Chikafumi Hodo and Nishant Kumar of Reuters report, Japan pensions bet on hedge funds to boost returns:
Japan's
corporate pension funds, hobbled by a sluggish domestic stock market,
are raising their allocations to hedge funds as they scramble to boost
returns for the country's ageing population.
The
move is part of a broader trend in Asia where institutions are looking
to raise exposure to hedge funds in search for absolute positive
returns and as confidence in the asset class improves, lifting
prospects for the $2 trillion (1.2 trillion pound) global hedge fund
industry.
Nearly
all of Japan's corporate pension funds, which collectively manage more
than $900 billion, have lowered their guaranteed yield in the last
decade from about 5.5 percent to below 3.5 percent on average, industry
observers said.
"Considering that
they have had a very hard time raising decent returns by directly
investing in equities over the past years, pension funds are now very
seriously considering taking more exposure in alternatives," Tamotsu
Adachi, the co-head of private equity firm Carlyle's Japan unit, told
the Reuters Rebuilding Japan Summit in Tokyo this week.
A
survey of 31 Japanese corporate pension funds by U.S. fund manager
Russell Investments showed pensions slashing investment in domestic
equities to 14.6 percent of their assets on average as of end-March from
18.7 percent a year earlier.
By
contrast, the 31 pension funds, which manage 7.54 trillion yen, said
they had increased allocations to hedge funds and other alternative
assets to 13.1 percent of their assets from 11.6 percent a year ago.
"In
these conditions where Japanese pension funds are having trouble
finding a return driver, they have to rely more on alternative assets,
mainly hedge funds," said Mitsuhiro Arakawa, executive consultant at
Russell Investments."They don't
want to be in stocks after seeing them slump over the last 10 to 20
years. In fact, they may want to cut them at a quicker pace after the
disaster in Japan," Arakawa said.
The
blow of the March 11 earthquake and tsunami and ensuing nuclear crisis
knocked the Japanese economy into recession and battered stocks.
Japan's benchmark Nikkei average is still down about 7 percent since the earthquake.Some
corporate pensions are aiming to park as much as 40 percent of their
assets in hedge funds, said Futoshi Ago, director at the prime brokerage
arm of Bank of America Merrill Lynch in Tokyo.
Takahiro
Mitani, president of the Government Pension Investment Fund, told the
summit that while he had no plans to start investing in hedge funds
immediately, the fund was evaluating the option. The GPIF, which holds
about $1.4 trillion in assets, is known as a conservative fund that
parks about two-thirds of its assets in Japanese government bonds.
GROWING TREND
The
Nikkei stock average has lost about a third of its value in the last
10 years. By comparison, the Eurekahedge Hedge Fund Index has surged
160 percent, forcing institutions to rejig their asset allocations.
While
Japanese corporate pension funds have kept their allocations to
foreign stocks at around 20 percent of their assets in the past decade,
they have cut their exposure to domestic shares by half. Investments
in alternatives have risen to 13 percent from less than 3 percent.
Across
Asia, institutions are preparing to invest more or are looking to
start investing in hedge funds, after shying away from the asset class,
as an uncertain economic outlook forces them to look at instruments
that could benefit from falling markets.
South
Korea's National Pension Service, the world's No. 4 pension fund with
about $300 billion of assets, said earlier this month that it plans to
raise its investment in alternatives to above 10 percent by 2016 from
5.8 percent in 2010 as a part of its move to diversify.
The
industry has also received allocations from Chinese, Taiwanese and
Malaysian institutions among others in Asia with more likely to join the
fray.
"The market is far more
ready now to make allocations to hedge funds. Clearly I think that the
large institutions are setting the path for others to follow," said Max
Gottschalk, co-founder of Gottex Fund Management, one of the world's
biggest fund of hedge funds.
Only
about 18 percent of global hedge fund assets are sourced from Asia,
according to a Credit Suisse survey of 600 institutional investors
representing $1.2 trillion of allocations to single-manager hedge funds.
"I
think we are still in the early phase of adoption to alternatives in
Asia and I think over the next 5-10 years Asia will become a far more
prominent investor in this asset class," said Gottschalk who moved to
Hong Kong earlier this year.
Several thoughts came to me as I read this article. First, global assets into hedge funds are growing ever larger,
meaning their influence in financial markets will become even more
important. This is another source of liquidity and leverage, and keep in
mind most hedge fund assets are in directional strategies: Long/Short
Equity, global macro and commodity trading advisors (CTAs). This means
you will see ever larger swings in risk assets on the way up and on the
way down.
Second, with an aging population, Japan's corporate
plans need to manage liquidity risk very carefully. This too means they
will be biased towards directional absolute return strategies where
liquidity and scalability are not as much of an issue as market neutral
strategies. The problem is that there a lot of beta in these directional
strategies and these corporate plans don't want to end up paying 2
& 20 in fees for beta.
Third, Asian institutions have an
advantage of knowing who the good managers are in their own backyard but
I would recommend they diversify into North American and European
funds. They can go the fund of funds route, but they will end up paying
an extra layer of fees, which might work fine until the next global
crisis hits. These corporate plans need a strategy, and I would
recommend managed account platforms (not just brand names) and direct
investment into hedge funds. This is where funds like Ontario Teachers'
are moving and for good reason, they and others got hammered with
illiquid hedge funds putting up gates (and side pocket letters) during
the 2008 crisis and are now managing liquidity risk much tighter.
Fourth, I worry that all these assets flowing into global hedge funds will dilute returns going forward and sow the seeds of the next crisis.
It's not guaranteed but you have to pay attention to global trends in
hedge funds because they're increasingly becoming the alternative
investments of choice for global pension funds looking to juice their
returns while they manage liquidity risk very closely.
Finally, there is an intelligent way and a dumb way to invest in hedge funds. I'd be glad to discuss some more ideas with these Japanese corporate pension plans and introduce them to some of Quebec's absolute return managers. In particular, one experienced manager who is setting up his relative value commodities trading fund
with his partners, is a perfect fit for these plans. If you're
interested in knowing more, please contact me at LKolivakis@gmail.com.
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In context of Arnie Gundersen's et al work, the Japanese have little reason to concern themselves with trivial issues as pension plans!
Poor Japan, havent done anything right since a Godzilla movie, now going all-in on hedge funds and certain 3rd 'lost decade' in a row after the losses such a stupid decision will cause.
tsutanai ochido
Everyone in the pool!
Just like in America, where all returns are above average.
Share your worry if everyone utilizes Hedge Funds and we become even more leveraged trying to beat the other guy. New financial terminolgy making financial reporting does not inspire confidence in fundamentals---juice returns, shadow banking, gig , off balance sheet accounting, unregulated derivatives, borrowing from employee pension funds, etc.
Because making ever-riskier wagers to try to gamble your way out of a hole has ALWAYS been a sound strategy.
Dizzying New Heights of Global Criminal Enterprise.....
http://seenoevilspeaknoevilhearnoevil.blogspot.com/2011/06/dizzying-new-...
Dang Leo, and I thought bailing out the TBTF and endless QE would solve it all.