Japanese Distributors Ponder Seeding Ventures...Again
"If you have made mistakes...there is always another chance for you...you may have a fresh start any moment you choose, for this thing we call 'failure' is not the falling down, but the staying down."
Mary Pickford (1893 - 1979), actress
After a number of years dabbling in hedge fund seeding talk is circulating again in Tokyo that several alternative investment product distributors are looking to get into the hedge fund seeding/incubation business. As ever, a key question remains what business model will the "winners" employ?
Japanese institutional investors have not been strangers to the seeding business. It is a well known fact that Japanese trading companies with a penchant for risk-taking have been historically the best suited to the private equity type of risk tolerance that exists.
Itochu famously gave a helping hand to Charles Hall of the Clinton Group back in the day, and was handsomly rewarded when he eventually bought out his Japanese seeder many years later.
Another interloper was Orix which was notable for having been an early investor behind a number of the most famous U.S. managers back in the 1990s. Apparently they took this experience one step further by taking it onshore in the early 2000s only to shutter it, presumably due to lack of performance.
And then there were the haphazard experiences of a few domestic Japanese regional banks that sought to opem up internal "prop desks" and retro-fit some kind of hedge fund structure around them to offer their clients (at typically higher fees). Due to risk management issues and the fact that the PMs were still the same "salaried employees" this was not even close to being an actual practicing hedge fund operation. More often than not it was a cleverly disguised marketing gimick taking advantage of a commodities run-up or global macro opportunity that saw huge profits in those strategies a year or so earlier.
More recent forays into seeding (single hedge fund managers) has come from brokers out of the U.S. most notably Nikko and Nomura. The former bought in a CTA team and built an initial track record in the early 2000s and then sold capacity to Japanese institutional investors. For a liquid model targeting financial futures ot did rather well managing to raise approx. US$800 million in its heyday. Nomura too had established a large fixed income vehicle which soaked up billions of AUM from institutional investors (including pension funds) to its outpost in Hong Kong. Later, that business then effectively split off and went independent once the broker decided to curtail its balance sheet risk profile.
Trust banks have also been dipping their toes into the seeding waters. Sumitomo Trust "teamed up" with Morgan Stanley offering access to emerging managers who might have been interested in launching under the legal unbrella of the biggest trust product distributor to Japan's pension market. The trouble is that the Hong Kong structure has not exactly attracted a whole swath of emerging managers. In the early days, they were not even offering start-up capital/working capital for wannabe managers and yet they wanted to take 30% of the economics of their business- hardly a solid foundation for success.
Other Japanese asset management companies have tried to "cloak" internal quant models that provide low risk-adjusted returns to domestic investors. Interestingly, no foreign FoHF firms would go near these products or invest in them because of their under-performance. That was interesting, as it showed that for non-Japanese investors a hedge fund approach was focusing pretty much on absolute performance for their global portfolios, whereas, for Japanese institutional investors the focus was more on capital preservation in Japanese equities often utilizing a beta-neutral investment philosophy (which often meant low returns). A few asset managers affiliated to life insurance companies have found this out the hard way - by trial and error.
But in 2007 times may be changing.
Now, it might be with swollen financial coffers local distributors will plan to grow back client demand for hedge fund product after the Redemption Tsunami of 2005/06. They now know that to build real future capacity in the hedge fund business they will have to be closer to the alpha producers. They cannot rely on their traditional "gatekeepers" - the foreign-led fund of hedge funds.
The choices are numerous. Perhaps they may be best served by seeding managers in more of a "hands-off approach" - as external prop desks utilizing an external platform/risk manager working under a separate brand and vehicle. Here they add capital and presumably share in risk analytics and the reporting/client contacts that happens as capacity is eventually pushed downstream (to the pensions). In this model they might even share in the ecnomics of the business. That might be one long-term option.
Another might be to go back to the internal prop desk model, one currently being nutured by UAM (United Asset Managers), ironically, a foreign hedge fund/asset manager who offer institutional quality infrastructure and capacity to foreign and Japanese institutional investors. The problem here is that domestic financial institutions still do not offer genuinely rewarding financial packages wihout disrupting their own incentive structures. Many senior managers still don't "get it" that with risk should come reward, even significant reward! Of course, one way around the short run need to hand over cash may be to jointly establish with employees an enterprise that can IPO so that all participants win: the PMs, the seed provider firms as well as the bureaucrat managers. This is a model that Nikko Alternatives in NY favors.
At the end of the day real success will be determined by offering the market quality products that are liquid, provide transparency and that are scalable to soak up the many billions of yen that are waiting to be put to work.
So what is the business and revenue model that has worked best in the west, and that could be imported into Japan? That is the 64 trillion Yen question. Mahalo.
"If you have made mistakes...there is always another chance for you...you may have a fresh start any moment you choose, for this thing we call 'failure' is not the falling down, but the staying down."
Mary Pickford (1893 - 1979), actress
After a number of years dabbling in hedge fund seeding talk is circulating again in Tokyo that several alternative investment product distributors are looking to get into the hedge fund seeding/incubation business. As ever, a key question remains what business model will the "winners" employ?
Japanese institutional investors have not been strangers to the seeding business. It is a well known fact that Japanese trading companies with a penchant for risk-taking have been historically the best suited to the private equity type of risk tolerance that exists.
Itochu famously gave a helping hand to Charles Hall of the Clinton Group back in the day, and was handsomly rewarded when he eventually bought out his Japanese seeder many years later.
Another interloper was Orix which was notable for having been an early investor behind a number of the most famous U.S. managers back in the 1990s. Apparently they took this experience one step further by taking it onshore in the early 2000s only to shutter it, presumably due to lack of performance.
And then there were the haphazard experiences of a few domestic Japanese regional banks that sought to opem up internal "prop desks" and retro-fit some kind of hedge fund structure around them to offer their clients (at typically higher fees). Due to risk management issues and the fact that the PMs were still the same "salaried employees" this was not even close to being an actual practicing hedge fund operation. More often than not it was a cleverly disguised marketing gimick taking advantage of a commodities run-up or global macro opportunity that saw huge profits in those strategies a year or so earlier.
More recent forays into seeding (single hedge fund managers) has come from brokers out of the U.S. most notably Nikko and Nomura. The former bought in a CTA team and built an initial track record in the early 2000s and then sold capacity to Japanese institutional investors. For a liquid model targeting financial futures ot did rather well managing to raise approx. US$800 million in its heyday. Nomura too had established a large fixed income vehicle which soaked up billions of AUM from institutional investors (including pension funds) to its outpost in Hong Kong. Later, that business then effectively split off and went independent once the broker decided to curtail its balance sheet risk profile.
Trust banks have also been dipping their toes into the seeding waters. Sumitomo Trust "teamed up" with Morgan Stanley offering access to emerging managers who might have been interested in launching under the legal unbrella of the biggest trust product distributor to Japan's pension market. The trouble is that the Hong Kong structure has not exactly attracted a whole swath of emerging managers. In the early days, they were not even offering start-up capital/working capital for wannabe managers and yet they wanted to take 30% of the economics of their business- hardly a solid foundation for success.
Other Japanese asset management companies have tried to "cloak" internal quant models that provide low risk-adjusted returns to domestic investors. Interestingly, no foreign FoHF firms would go near these products or invest in them because of their under-performance. That was interesting, as it showed that for non-Japanese investors a hedge fund approach was focusing pretty much on absolute performance for their global portfolios, whereas, for Japanese institutional investors the focus was more on capital preservation in Japanese equities often utilizing a beta-neutral investment philosophy (which often meant low returns). A few asset managers affiliated to life insurance companies have found this out the hard way - by trial and error.
But in 2007 times may be changing.
Now, it might be with swollen financial coffers local distributors will plan to grow back client demand for hedge fund product after the Redemption Tsunami of 2005/06. They now know that to build real future capacity in the hedge fund business they will have to be closer to the alpha producers. They cannot rely on their traditional "gatekeepers" - the foreign-led fund of hedge funds.
The choices are numerous. Perhaps they may be best served by seeding managers in more of a "hands-off approach" - as external prop desks utilizing an external platform/risk manager working under a separate brand and vehicle. Here they add capital and presumably share in risk analytics and the reporting/client contacts that happens as capacity is eventually pushed downstream (to the pensions). In this model they might even share in the ecnomics of the business. That might be one long-term option.
Another might be to go back to the internal prop desk model, one currently being nutured by UAM (United Asset Managers), ironically, a foreign hedge fund/asset manager who offer institutional quality infrastructure and capacity to foreign and Japanese institutional investors. The problem here is that domestic financial institutions still do not offer genuinely rewarding financial packages wihout disrupting their own incentive structures. Many senior managers still don't "get it" that with risk should come reward, even significant reward! Of course, one way around the short run need to hand over cash may be to jointly establish with employees an enterprise that can IPO so that all participants win: the PMs, the seed provider firms as well as the bureaucrat managers. This is a model that Nikko Alternatives in NY favors.
At the end of the day real success will be determined by offering the market quality products that are liquid, provide transparency and that are scalable to soak up the many billions of yen that are waiting to be put to work.
So what is the business and revenue model that has worked best in the west, and that could be imported into Japan? That is the 64 trillion Yen question. Mahalo.
posted by Franklin Scruggins | 3:27 PM
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