Hedge Fund Monitoring Set for September 2007

"The participant's perspectives are clouded while the bystander's views are clear."

Ancient Chinese proverb.

News out of Tokyo that domestically domiciled hedge fund managers will have to provide annual information regarding performance and assets from September 2007 should come as no surprise. The discussion had been been floated among other Asian central bankers and authorities for some time now.

The authorities are also not so naïve as people think! They know that Japan’s US$60+ billion hedge fund market probably has another US$50-60 billion coming from global managers at any one time. They have seen the component classified as "Foreigners" creep up in recent years on TSE Section 1 and Section 2 equities to over 42% over the last few years from the low 30% level.

Over this time certain elements of Japan Inc. have also unofficially sanctioned the growing impact of investor activism as an invaluable catalyst to foster an upgrading of the industrial landscape, to keep "lazy" Japanese corporate leaders in touch with shareholder value and proper corporate performance.

What is uncertain is whether this announcement will eventually be extended to include managers (the bulk of which) who not domiciled in Japan and yet trade Japanese and Asian securities. This is the delicate position of the FSA.

Registration of domestic PMs might be construed as a form of moral hazard for domestic Japanese institutions. Some of those investors might only choose those managers "sanctioned" by the domestic authority by being on the list. Ironically, this might simply offer an opening for Japanese banks, brokers and money managers wanting to market their own alternative investment products.

Another consideration is the extra costs associated with this despite apparent benefits. If there is additional bureaucracy and/or costs involved it might actually prompt even more managers to transfer the key PM decision-makers offshore (to Singapore or Hong Kong) to avoid the obstacle. Many of these jurisdictions already enjoy favorable corporate and personal tax environments and have benefited from a steady stream of emerging managers setting up overseas. Adding to this trend would be a sad cost to bear for the industry as a whole.

Instead, the biggest contribution that Japan’s authorities could insist on is to insist on greater transparency where it comes to fees paid by investors for many hedge fund and hedge fund of fund products. Many domestic investors do not benefit from the activities of so-called intermediaries (many of them Japanese trading companies, brokers and banks) . And the complication of fees is increased for products that are sold through retail channels. Making these promoters clarify to the retail public exactly what they are paying in fees would go a long way towards adding to the real issue of transparency in the marketplace - providing information to the investor so that they can decide for themselves what they want to invest in!

Mahalo.