Nippon Life: One Step Forward, Two Steps Back?
"The best way to keep one's word is not to give it."
Napoleon Bonaparte (1769-1821)
Surprise! Surprise! Japan's largest life insurance company has just announced to the media (Bloomberg) that it will boost it's allocations to hedge funds by US$300 Million from a current US$920 Million.
Nippon Life's annoucement is in line with other institutional investors in the U.S. and Europe. Many of these organizations with fixed liabilities heading into the future (pensions/insurance claims) have seen the bulk of their investments suffer the pains of falling equity markets, real estate, credit and most recently commodities. Quite literally this has led to many portfolios only reaching a 0%-5% target range, when they typically have to reach a 7-8% bogey in order to reach their investment goals over a particular time period.
Now we have Nippon Life declaring that distressed assets look sexy! Well, certainly if one had been shorting the asset class like John Paulson over 2007 one would have produced outsized positive returns. For the rest of us, it is worth remembering that distressed investments are typcially long-biased and very dependent on credit spreads in addition to the equity market movements adn liquidity.
As any junior fund-of-hedge-fund (HFoF) analyst would know, over the last 12-months through July 2008, this asset class has produced negative returns e.g. Credit Suisse/Tremont Distressed Securities Index returned minus 4.36%. This makes investing in distressed securities a very tough proprosition to justify to an investment committee especially if it is done through a double-fee paying vehicle like a FoHF.
Certainly an investment in credit and distressed securities might make sense depending on your expectations for the strategy.
Even then, one should be worried. For example, many managers do not expect a material increase in bankruptcies in the third quarter of 2008 even though they do expect credit and macroeconomic fundamentals to deteriorate. As with other credit strategies, the situation in the short term is likely to remain unchanged from the second quarter. This means increasing volatility driven up or down by the broader equity or credit market moves, in addition to the occasional company-specific event.
The other issue that the recent declaration revealed was the apparent absence in investment in directional managers, specifically global macro and managed futures. Ironically, these two produced perhaps the strongest returns over a recent 12-month period of in excess of 14% according to the respective Credit Suisse/Tremont substrategy indices.
Why has Nippon Life avoided these strategies is a relevant question to ask? This makes no sense, unless there are legacy issues surrrounding previous management/NL regimes that invested in such strategies and they "blew up". Once bitten, twice shy.
Finding an appropriate investment strategy takes thought and hopefully not too many mistakes (like investing in Asian funds). What is important is the way those investments are made, which means looking at the cost, as well as the scalability of the vehicles and correlation issues.
It must surely be time for Nippon Life and others to consider buying a HFoF or simply getting into the hedge fund incubation business in order to maximize the enterprise value of those investments and at the same time to gain some access to capacity. But as a few others have already learned,hooking up with the "best" managers is not as easy as it sounds. Either way the clock is ticking on Japanese institutional investors to get their respective programs sorted out sooner rather than later. Mahalo.
"The best way to keep one's word is not to give it."
Napoleon Bonaparte (1769-1821)
Surprise! Surprise! Japan's largest life insurance company has just announced to the media (Bloomberg) that it will boost it's allocations to hedge funds by US$300 Million from a current US$920 Million.
Nippon Life's annoucement is in line with other institutional investors in the U.S. and Europe. Many of these organizations with fixed liabilities heading into the future (pensions/insurance claims) have seen the bulk of their investments suffer the pains of falling equity markets, real estate, credit and most recently commodities. Quite literally this has led to many portfolios only reaching a 0%-5% target range, when they typically have to reach a 7-8% bogey in order to reach their investment goals over a particular time period.
Now we have Nippon Life declaring that distressed assets look sexy! Well, certainly if one had been shorting the asset class like John Paulson over 2007 one would have produced outsized positive returns. For the rest of us, it is worth remembering that distressed investments are typcially long-biased and very dependent on credit spreads in addition to the equity market movements adn liquidity.
As any junior fund-of-hedge-fund (HFoF) analyst would know, over the last 12-months through July 2008, this asset class has produced negative returns e.g. Credit Suisse/Tremont Distressed Securities Index returned minus 4.36%. This makes investing in distressed securities a very tough proprosition to justify to an investment committee especially if it is done through a double-fee paying vehicle like a FoHF.
Certainly an investment in credit and distressed securities might make sense depending on your expectations for the strategy.
Even then, one should be worried. For example, many managers do not expect a material increase in bankruptcies in the third quarter of 2008 even though they do expect credit and macroeconomic fundamentals to deteriorate. As with other credit strategies, the situation in the short term is likely to remain unchanged from the second quarter. This means increasing volatility driven up or down by the broader equity or credit market moves, in addition to the occasional company-specific event.
The other issue that the recent declaration revealed was the apparent absence in investment in directional managers, specifically global macro and managed futures. Ironically, these two produced perhaps the strongest returns over a recent 12-month period of in excess of 14% according to the respective Credit Suisse/Tremont substrategy indices.
Why has Nippon Life avoided these strategies is a relevant question to ask? This makes no sense, unless there are legacy issues surrrounding previous management/NL regimes that invested in such strategies and they "blew up". Once bitten, twice shy.
Finding an appropriate investment strategy takes thought and hopefully not too many mistakes (like investing in Asian funds). What is important is the way those investments are made, which means looking at the cost, as well as the scalability of the vehicles and correlation issues.
It must surely be time for Nippon Life and others to consider buying a HFoF or simply getting into the hedge fund incubation business in order to maximize the enterprise value of those investments and at the same time to gain some access to capacity. But as a few others have already learned,hooking up with the "best" managers is not as easy as it sounds. Either way the clock is ticking on Japanese institutional investors to get their respective programs sorted out sooner rather than later. Mahalo.
posted by Franklin Scruggins | 6:02 AM
2 Comments:
What's your feeling about the Lehman mess and how will that effect asian markets?
Getting close to capitulation in this whole thing. Odds shifting towards recession in Asia in which case China exposure may suffer badly and Japan which relies on China may slide also. Best to stay in cash for now.
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