Hedge Funds: The Growing Visible and Invisible Force in Japanese Equities
"When money is at stake, never be the first to mention sums."
Sheikh Ahmed Yamani, b.1930, former Saudi Arabian oil minister
The impact of hedge funds on Japan's financial markets is well documented. What is less known and yet key for the supervisory authorities (BoJ, FSA etc.) and financial intermediaries (prime brokers, exchanges, administrators, custodians etc.) is where this growth in hedge fund activity will be tomorrow?
I think part of the answer lies in the U.S. and the development of the industry over there.
First some color. Again, we are restricting talk to Japan and mainly equities and equity-related derivatives. Consider a 2006 Columbia University study that looked at 2001, 2003 and 2005. The numbers of Japan hedge funds increased thus: 152, 178 then 406. Assets under management (and before leverage) over this period increased thus: $13 billion, $21 billion then $55 billion.
These numbers pale before the size of the TSE market capitalization, which is where I noticed that the author did not include the impact of so-called "Big Global Funds". Isn't one of the biggest hedge funds in Tokyo (after Sparx) Citadel? And isn't it the case that SAC and in the past GLG have been very active sources of Japanese equity brokerage commission on "The Street"? So why not include these and other heavy-hitters in any calculation of hedge funds on Japanese equities? How can anyone dare to claim they know the size of the universe of hedge funds in Japan and not include any estimate of these players?
Admittedly, in some cases it may be taking place where you have a global player (a la Och-Ziff) with a dedicated Asia Multi-Strategy fund product. But the fact remains, only a few of these players have numbers that you can trace - many do not. Also, it is not so clear exactly what proportion of total AUM a global player has decided to dedicate to Japanese equities or related strategies. They tend to be by their very nature very opportunistic in chasing alpha producing opportunities around the world.
Plus, what about the growth of regional managed account and managed account platforms that mimic the performance of hedge funds themselves? This is another aspect that is not "picked up" by so-called knowledgeable database vendors. What a hole in our understanding of the impact of hedge funds on Japan.!And that is before you even consider things like market depth in various equity cap sizes (believe it or not it changes), liquidity, implied volatility in certain strategies (like convertible arbitrage) as well as leverage employed, cost/availability of borrow etc.
Bottom line: we are currently grossly underestimating the impact of hedge funds on Japanese financial markets. I for one am not surprised that hedge funds might account for about 33% of the market capitalization of TSE equities in 2005/06. Goodness! It might even be higher.
Why? Take a look at the trading value of stocks (Tokyo, Osaka and Nagoya) by types of investors. For the month of Oct 2006, the category called "Foreigners" accounted for close to 42% of the value of all shares traded. In 2002/03 this number was around 31%. This category probably accounts for the bulk of hedge fund activity on the cash equity side, and it does not really even account for the derivatives where they are likely to be equally large players.
Interesting too, "Member Accounts" (stock exchange members who are mostly Japanese) was at 26%, "Insurance Companies" at 0.15%, "Banks" at 6%, "Investment Trusts" at under 2%,
"Corporate Business" at 1.35% and "Individuals" at 22% (data courtesy of exchanges).
What does this all mean? Well, it looks to me on the surface that Japanese institutional investors are not very active purchasers of their own stocks (perhaps as they have been burned so much in the past) and perhaps as their investments are skewed so blatantly towards fixed income and fixed income-like vehicles (like real estate).
This cursory analysis also suggests that the next time the market takes a nose-dive, it might be the stampede of "Foreigner" and "Individuals" who you will hear heading for the door. And that might not be so easy to collectively manage for the authorities as it did so vigorously through various administrative measures in the past.
On the bright side, there may be a developing argument for Japanese equities to become a greater part/portion of the domestic institutional investor appetite. After all, this is Japan Inc. we are talking about with many world class companies now focused on promoting shareholder value. And what about the elephant of public funds in the room? That is for another day. Mahalo.
"When money is at stake, never be the first to mention sums."
Sheikh Ahmed Yamani, b.1930, former Saudi Arabian oil minister
The impact of hedge funds on Japan's financial markets is well documented. What is less known and yet key for the supervisory authorities (BoJ, FSA etc.) and financial intermediaries (prime brokers, exchanges, administrators, custodians etc.) is where this growth in hedge fund activity will be tomorrow?
I think part of the answer lies in the U.S. and the development of the industry over there.
First some color. Again, we are restricting talk to Japan and mainly equities and equity-related derivatives. Consider a 2006 Columbia University study that looked at 2001, 2003 and 2005. The numbers of Japan hedge funds increased thus: 152, 178 then 406. Assets under management (and before leverage) over this period increased thus: $13 billion, $21 billion then $55 billion.
These numbers pale before the size of the TSE market capitalization, which is where I noticed that the author did not include the impact of so-called "Big Global Funds". Isn't one of the biggest hedge funds in Tokyo (after Sparx) Citadel? And isn't it the case that SAC and in the past GLG have been very active sources of Japanese equity brokerage commission on "The Street"? So why not include these and other heavy-hitters in any calculation of hedge funds on Japanese equities? How can anyone dare to claim they know the size of the universe of hedge funds in Japan and not include any estimate of these players?
Admittedly, in some cases it may be taking place where you have a global player (a la Och-Ziff) with a dedicated Asia Multi-Strategy fund product. But the fact remains, only a few of these players have numbers that you can trace - many do not. Also, it is not so clear exactly what proportion of total AUM a global player has decided to dedicate to Japanese equities or related strategies. They tend to be by their very nature very opportunistic in chasing alpha producing opportunities around the world.
Plus, what about the growth of regional managed account and managed account platforms that mimic the performance of hedge funds themselves? This is another aspect that is not "picked up" by so-called knowledgeable database vendors. What a hole in our understanding of the impact of hedge funds on Japan.!And that is before you even consider things like market depth in various equity cap sizes (believe it or not it changes), liquidity, implied volatility in certain strategies (like convertible arbitrage) as well as leverage employed, cost/availability of borrow etc.
Bottom line: we are currently grossly underestimating the impact of hedge funds on Japanese financial markets. I for one am not surprised that hedge funds might account for about 33% of the market capitalization of TSE equities in 2005/06. Goodness! It might even be higher.
Why? Take a look at the trading value of stocks (Tokyo, Osaka and Nagoya) by types of investors. For the month of Oct 2006, the category called "Foreigners" accounted for close to 42% of the value of all shares traded. In 2002/03 this number was around 31%. This category probably accounts for the bulk of hedge fund activity on the cash equity side, and it does not really even account for the derivatives where they are likely to be equally large players.
Interesting too, "Member Accounts" (stock exchange members who are mostly Japanese) was at 26%, "Insurance Companies" at 0.15%, "Banks" at 6%, "Investment Trusts" at under 2%,
"Corporate Business" at 1.35% and "Individuals" at 22% (data courtesy of exchanges).
What does this all mean? Well, it looks to me on the surface that Japanese institutional investors are not very active purchasers of their own stocks (perhaps as they have been burned so much in the past) and perhaps as their investments are skewed so blatantly towards fixed income and fixed income-like vehicles (like real estate).
This cursory analysis also suggests that the next time the market takes a nose-dive, it might be the stampede of "Foreigner" and "Individuals" who you will hear heading for the door. And that might not be so easy to collectively manage for the authorities as it did so vigorously through various administrative measures in the past.
On the bright side, there may be a developing argument for Japanese equities to become a greater part/portion of the domestic institutional investor appetite. After all, this is Japan Inc. we are talking about with many world class companies now focused on promoting shareholder value. And what about the elephant of public funds in the room? That is for another day. Mahalo.
posted by Franklin Scruggins | 1:09 PM
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