No Hemorrage From Japan Long/Short Equity...Yet

"I believe that crisis really tends to help develop the character of an organization."

John Sculley, former president of Apple Computer Inc.

While poor performance continues to hang over Japan Long/Short Equity managers like a bad cold that has been hard to shake off (even after 18 months), it is interesting to see if anecdotal evidence suggests the beginning of a run for the exits as it relates to Japan. And if so, where is the money going?

First, an update on hedge fund performance. Out of a sample of 34 funds (randomly selected) from a well-known Swiss bank list, their YTD net of fee return average performance stood at -0.91% through the first week of May 2007. This compares to a positive 1.90% return YTD in the Nikkei 225 Index. So the absolute return argument for Japan Long/Short funds on average remains a little tricky.

Second, assets. For the same 34 funds, combined AUM came in at US$13.6 billion. This compares to US$13.9 billion back in February, or a fall off of 2%. Certainly nothing that could necessarily be considered a major change in investor flows.

Composition of flows. Within the Japan Long/Short Equity fund mix was has been interesting have been early signs of a shift which are not related to performance moves alone. The biggest gainers in absolute dollar terms have been Arcus, DB Equilibria Japan Fund, Joho and Platinum Japan. The thread which appears here suggests money going into unique and long term stock pickers that have company specific skills or a markete neutral approach or a broader regional investment philosophy. In terms of losers, funds that have suffered steeper than usual outflows include: Asuka Japanese Equity Long/Short Trust, Boyer Allan Japan Fund, Melchoir Japan and to a lesser extent Whitney New Japan Investors Ltd. Perhaps a broad theme there tends to be that these funds have been relatively poor performers over the last 6-12 months.

Of course this is just a small sample and one should be wary of making generalizations. But that said, a pattern may be slowing appearing and current investors (long term institutional) and short term FOHF would be wise to monitor the situation in coming months. Remember that after the summer a number of investors start to make serious allocation decisions as performance heads into the final stretch of the calendar year.
Mahalo.

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.