Nomura Continues Global Hedge Fund Pitch

"Business, more than any other occupation, is a continual calculation, an instinctive exercise in foresight."

Henry R. Luce (1898-1967)

After over 20 years "playing defence" by Japanese financial institutions, Nomura just signalled to the world an aggressive offensive strategy to make waves in the US$1.375 trillion global hedge fund industry. Bloomberg reported that Japan's largest broker paid close to US$890 million for a 15% stake in Fortress, in a deal that values the hedge fund/private equity manager at approx. US$6 billion. Rich indeed.

Nomura's purchase follows on from its November 2006 purchase of Instinet, the electronic equity execution shop from Silver Lake Partners. The jewel of the Instinet deal was its roster of an estimated 700 hedge fund clients.

This made sense, as an increasing number of hedge funds have been turning to direct market access and other low-transaction cost pipes to execute buy/sell orders as low as 2 bps a share versus the 15-20 bps a share transaction costs associated with broker-fed orders who promote their research-led value-add model.

What is going on? In the former instance, Nomura will be able to further increase its penetration (one would think) into higher margin global hedge fund execution business. Ironically, this business rather than the Asia or Japan long/short equity managers has the highest value in the hedge fund industry. First, because order put-throughs are bigger and second, they tend to use more leverage and sophisticated derivative instruments. This should contribute to the Nomura bottom line from day one.

The Instinet transaction gave them critical market penetration on the commodity side of the industry. One that is growing at a fast rate at the moment. Despite what they say, it also gives them access to "flow", that is to say they will be able to "see" where the multi-currency hedge fund flows are going in the world and so better be able to respond in competitive pricing in its battle to get a share of high-margin credit derivatives, commodity trading and loan services.

Who knows, a next logical step might even be to set up a bone fide prime brokerage operation? Of course, that would require a greater balance sheet capital committment in addition to an assortment of other legal and re-rating considerations.

Finally, Nomura can now start to effectively broaden its range of hedge fund and private equity products to sell through its retail brokerage network as well as to domestic institutional investors.

Nomura has existing product distribution relationships with Blackrock (for fixed income products) as well as with Thomas Weisel in the area of private equity. Of course this presupposes that the portfolio managers and traders at Fortress who, coincidentally are looking for an even greater payoff with an upcoming IPO, will stay around to continue in the business. That is a big question-mark.

With a baby step now in place to grab some of the global hedge fund business one can expect potentially more strategic acquisitions in other growing areas such as credit derivatives, commodities, foreign exchange and risk arbitrage. Sounds very much like the Morgan Stanley model doesn't it?

Also, one would expect a return back to analyzing Japan with a view to breaking into the GS, MS cartel of business that has a stranglehold on many Japanese manager and strategy flows. Why? Because the comparatively smaller Asian hedge fund business is in high growth mode and will continue to attract global funds over the foreseeable future.

Indeed, a capital introduction service and incubator as part of a renewed emphasis on Asian hedge funds may only be a matter of time...

The only missing piece would then be a range of Nomura fund of hedge fund products. How fitting a comeback would that be! Mahalo.