Japanese Broker Eyes Hedge Fund Platform

"The basic difference between an ordinary person and a warrior is that a warrior takes everything as a challenge while an ordinary person takes everything as a blessing or a curse".

Carlos Castaneda, 1925-98, Peruvian-born American author

The big news of the summer is likely to be talk that Nomura is looking to buy HFR's asset management platform. The move would put Nomura well ahead of its peers (Nikko and Daiwa) in expanding its business footprint in the hedge fund business.

The rationale is clear - there has been a perceived "dip" in demand for hedge find product from financial institutions in Japan over the last 24 months based upon rule changes affecting banks and related to Basel II capital requirements (see "Understanding Basel II" April 9, 2007 blog).

Perceptions are big, and particularly in Japan. There, it is felt that offering investment opportunities into an array of managed accounts (via some form of Cayman SPC vehicle) will address some of the investor concerns regarding transparency.

Presumably, investors will have some access to real-time transparency. This in turn, should enable shops like Nomura better sell products to Japanese regional banks and the like. It should also help Nomura get back into prominence after a rumored US$2-3 billion of assets were redeemed by its investors over the last few years either due to poor performance, high fees or other negative related issues. Further, Nomura will be able to achieve "scale" overnight by getting access to a platform which might have around 30-50 funds already in place with capacity already negotiated (including the terms).

But lets not get carried away here. First, the quality of managers on the platform might actually be second tier. Which quality manager with a queue of investors outside his door would offer up capacity and potentially slimmer terms for the hassle of a managed account? Maybe only the "poorer" brethren. So there are performance questions.

Second, what types of negotiating with regards to fees has gone on between HFR and the manager and might there be in fact some conflict of interest issues?

Third, just because you have "transparency" will not prevent a hedge fund from failing. Look what happened to Lyxor and their investments in well known blow-up Safe Harbor (US$300-400 million MBS fund back in the day). You still have to verify pricing of some of the underlying assets, including all kinds of sophisticated credit-related structures.

Fourth, the managed account format with daily transparency-liquidity might not work well with certain illiquid strategies (bank loans etc). So, maybe you cannot replicate the model over all strategies...

In short, there are are many questions that the platform methodology raises. Certainly, some of these may not be convincing enough to certain institutional investors. I expect that Nomura will find a way to parlay the expected acquistion with an effort to offer "new" products to Japanese retail...they also might consider offering up the platform to other banks/brokers in Asia who simply want to tap into a ready made hedge fund solution with a deep bench of alpha generators across the hedge fund strategy spectrum that will simply be sold with their own distributor private label. Remember too that there already has been quite a lot of private talk of a pominent Japanese money-center bank working closely with one of the biggest hedge fund-asset management firms to create a managed account platform, seeded by the bank of course. So, competition is healthy.
Mahalo!