BIS Hangover Leads Japan Banks to Single Managers
"If one wants to be successful, one must think; one must think until it hurts. One must worry a problem in one's mind until it seems there cannot be another aspect of it that hasn't been considered."
Lord Thomson of Fleet (1894 - 1976), former chairman, Thomson Organization
Irony is a beautiful thing - except when it means a business model which had been chugging along successfully over the last few years suddenly enters into Japan's Tsunami Redemption of 2005/06. That is what hit many fund of hedge fund (FoHF) firms in Japan.
At the risk of going over previously stated insider views, an estimated US$12-15 billion in FoHF was redeemed during the period, the bulk of it from many of Japan's financial institutions. That means it came out of an estimated universe size of just over US$53 billion (according to FSA data). The fact is that other institutional investors also played a role in dumping FoHF product as performance disappointed.
Today, that leaves the revamped size Japan's hedge fund marketplace well short of the US$50+ billion high watermark achieved in the good ole days. In fact, it puts it closer to the US$35-38 billion level.
Feedback gleaned from various marketing trips by FoHF managers to Tokyo attests to a confused local picture.
Confused because aside from internal balance sheet considerations related to underlying asset classifications in HFoFs, a significant stumbling block to any pick-up in FoHF sales relates to transparency. Apparently, many investors demand to see full transparency of underlying managers and their portfolio exposures, features that the run-of-the-mill hedge fund of fund with a healthy US$2 -10 billion in AUM is not likely to have, let alone disclose.
The news for U.S. and European based HFoFs is not so good for 2007. Tokyo is now a black hole for potential product sales unless (like astute organizations such a Frank Russell) one has local contacts nutured as a consultant and an up-and-running distribution channel in the form of a brokerge license that feeds product directly into the arms of Japanese pension fund community. In this situation, Frank Russell has been a clear winner leaving the so-called best performing FOHFs in their wake.
Ironically, this might also "help" local institutional FoHF providers, who, one would expect, would at least have a closer ear to the ground in terms of what is expected from local investors. At the very least it buys them time to try and fill the product gap , if not with their own seeded FoHF then with their own seeded single manager product (see previous commentary).
Interesting too that this simplified situation has exceptions. For instance, one city bank based in Tokyo is mulling the following - rather than stunting their appetite for hedge funds the new BIS will actually promote it as they go for so-called more high octane single managers to make up for the yield that they would have gained from their FoHF exposure! So, a recommendation that was designed to curtail risk is actually resulting in a defiant attitude to actually take on more risk and go for higher octane performance.
Moreover, one group of the heaviest users of hedge funds, the regional banks, have stated privately that they will now step up their allocations to single managers, providing they can get a certain degree of transparency.
This is a very strong indication that single hedge funds should now think very carefully about more of a direct marketing campaign to Japanese investors, in order to capture some of the allocation potential that is likely in the months and year ahead. Certainly, this type of talk must be encouraging for those distributors who are looking to advance their managed account platforms.
In this regard, strategies that are scalable potentially global in nature and that provide good downside protection if and when equity markets tumble, should become popular. Brand name manager that have previously been picked up by the larger FoHFs may also make it given their name recognition among Japanese end investors.
One should also remember that the BIS rules have only minimal impact on those managers specializing in fixed income. So, FoHFs with a fixed income arbitrage bias should be in a position to do particularly well, as should well established single managers in this strategy.
The irony is that as many PB units are effectively responsible in a reporting sense to their equity departments, they have no incentive (and in many cases authority) to promote fixed income products - even if those are the types of products that the Japanese marketplace demands!
On another note, FoHFs will save themselves a lot of unnecessary money by seriously re-thinking how to re-position their products and fee structures in order not to be totally disintermediated by the very alpha producers they initially served to promote in a pooled format. The writer has already mentioned this potential in The Rise of the Mega Fund (Nov 30 2006) as well with regards to the upcoming 130-30 product phenomena.
The Bottom Line
This will clearly be a good time for PBs to "get busy" promoting worthy single managers in Japan- even to the previously "hot money" investors known as regional banks. The FSA pointed out in a 2005 report that a total of 64 financial institutions were actively investing in hedge fund product.
Further, if they have any foresight they would discover just what transparency investors are looking for and provide the "boilerplate" portal (in Japanese language) to willing and able managers. Who knows, they might even stumble onto another potential money-earner making the rounds again - the managed account platform. What an opportunity! Mahalo.
"If one wants to be successful, one must think; one must think until it hurts. One must worry a problem in one's mind until it seems there cannot be another aspect of it that hasn't been considered."
Lord Thomson of Fleet (1894 - 1976), former chairman, Thomson Organization
Irony is a beautiful thing - except when it means a business model which had been chugging along successfully over the last few years suddenly enters into Japan's Tsunami Redemption of 2005/06. That is what hit many fund of hedge fund (FoHF) firms in Japan.
At the risk of going over previously stated insider views, an estimated US$12-15 billion in FoHF was redeemed during the period, the bulk of it from many of Japan's financial institutions. That means it came out of an estimated universe size of just over US$53 billion (according to FSA data). The fact is that other institutional investors also played a role in dumping FoHF product as performance disappointed.
Today, that leaves the revamped size Japan's hedge fund marketplace well short of the US$50+ billion high watermark achieved in the good ole days. In fact, it puts it closer to the US$35-38 billion level.
Feedback gleaned from various marketing trips by FoHF managers to Tokyo attests to a confused local picture.
Confused because aside from internal balance sheet considerations related to underlying asset classifications in HFoFs, a significant stumbling block to any pick-up in FoHF sales relates to transparency. Apparently, many investors demand to see full transparency of underlying managers and their portfolio exposures, features that the run-of-the-mill hedge fund of fund with a healthy US$2 -10 billion in AUM is not likely to have, let alone disclose.
The news for U.S. and European based HFoFs is not so good for 2007. Tokyo is now a black hole for potential product sales unless (like astute organizations such a Frank Russell) one has local contacts nutured as a consultant and an up-and-running distribution channel in the form of a brokerge license that feeds product directly into the arms of Japanese pension fund community. In this situation, Frank Russell has been a clear winner leaving the so-called best performing FOHFs in their wake.
Ironically, this might also "help" local institutional FoHF providers, who, one would expect, would at least have a closer ear to the ground in terms of what is expected from local investors. At the very least it buys them time to try and fill the product gap , if not with their own seeded FoHF then with their own seeded single manager product (see previous commentary).
Interesting too that this simplified situation has exceptions. For instance, one city bank based in Tokyo is mulling the following - rather than stunting their appetite for hedge funds the new BIS will actually promote it as they go for so-called more high octane single managers to make up for the yield that they would have gained from their FoHF exposure! So, a recommendation that was designed to curtail risk is actually resulting in a defiant attitude to actually take on more risk and go for higher octane performance.
Moreover, one group of the heaviest users of hedge funds, the regional banks, have stated privately that they will now step up their allocations to single managers, providing they can get a certain degree of transparency.
This is a very strong indication that single hedge funds should now think very carefully about more of a direct marketing campaign to Japanese investors, in order to capture some of the allocation potential that is likely in the months and year ahead. Certainly, this type of talk must be encouraging for those distributors who are looking to advance their managed account platforms.
In this regard, strategies that are scalable potentially global in nature and that provide good downside protection if and when equity markets tumble, should become popular. Brand name manager that have previously been picked up by the larger FoHFs may also make it given their name recognition among Japanese end investors.
One should also remember that the BIS rules have only minimal impact on those managers specializing in fixed income. So, FoHFs with a fixed income arbitrage bias should be in a position to do particularly well, as should well established single managers in this strategy.
The irony is that as many PB units are effectively responsible in a reporting sense to their equity departments, they have no incentive (and in many cases authority) to promote fixed income products - even if those are the types of products that the Japanese marketplace demands!
On another note, FoHFs will save themselves a lot of unnecessary money by seriously re-thinking how to re-position their products and fee structures in order not to be totally disintermediated by the very alpha producers they initially served to promote in a pooled format. The writer has already mentioned this potential in The Rise of the Mega Fund (Nov 30 2006) as well with regards to the upcoming 130-30 product phenomena.
The Bottom Line
This will clearly be a good time for PBs to "get busy" promoting worthy single managers in Japan- even to the previously "hot money" investors known as regional banks. The FSA pointed out in a 2005 report that a total of 64 financial institutions were actively investing in hedge fund product.
Further, if they have any foresight they would discover just what transparency investors are looking for and provide the "boilerplate" portal (in Japanese language) to willing and able managers. Who knows, they might even stumble onto another potential money-earner making the rounds again - the managed account platform. What an opportunity! Mahalo.
posted by Franklin Scruggins | 1:46 PM
0 Comments:
Post a Comment
<< Home