Trading Companies Retreat From Hedge Fund Business
"He who is not courageous enough to take risks will accomplish nothing in life."
Muhammed Ali, former boxing world champion (b. 1942)
To date, the 4-5 biggest of Japan's trading companies have been treating from the hedge fund business. In their hey day, Japanese trading companies managed either directly or indirectly approximately US$8-10 billion of hedge fund product and brought it over to Japanese investors. Many of the these companies also invested (and some still do) on a proprietary basis in hedge fund strategies.
But the short term performance losses and redemption pressures from Japan-bsed investors have forced senior management in many of these firms to make an about face - in many cases to dump the same business model that they had built up since 2003/04.
By some accounts, Japanese institutional investors have put in 30%-40% redemptions with FoHF and single managers in 2008. The sudden and shocking appearance of "gates" and the move by some firms to imposee additional lock-ups sent many of them out, and potentially for good. At the very least it kepy up European and U.S. based operations to handle the Tokyo requests for clarity of what is going on in hedge fund land!
The fact of the matter is that Japanese institutional investors and many of their disrtributors are rotational investors. That means that they follow the "hot hand" in terms of strategy and manager. As investors you do not get rewarded for making good investment decisions, but you od get punished (by being sent to some remote regional posting) for bad investment decisions which means that the incentive system is also screwed up.
One such "victim", a prominent Japanese trading company has effectively shut down its business seeding 6-8 managers out of New York. In the old days they would try to find and negotiate equity on a one-for-one basis in return for US$20 million investment in the fund and in the firm (for operational fixed costs). The Japanese partner also marketed the returns to Japanese investors through its brokerage network back in Japan.
A similar pressure to streamline and/or retreat is now going on with other larger trading companies. But not all are moving back at the same pace. Mitsubishi is an exception. It has recently bought a stake in a European based finxed income arbitrage manager utilizing a relative value strategy. At the same time it is believed to have pulled somewhere in the order to US$200 MM from an existing investment that it had made with the CT seeder called Weston Capital.
Sumitomo has been a seeding manager with US$25-30 Million stakes and is apparently now culling those that "are not working" while focusing on those that are working. This means they are focusing on the positive performers (if indeed they have any of them).
Marubeni has not been doing too much although they were late to the business initially and when they did get involved they were CDO distributors in Japan. Of course that model has gone up in smoke!
The critical issue remains: what will Japanese institutional investors like pensions and some financial institutions do in the months and years ahead with equity markets likely to remain range-bound, the currency remaining strong and bond yields remaining very low? Surely they will have to find "profitable" absolute return product somehow? And where will that supply come from? Mahalo.
"He who is not courageous enough to take risks will accomplish nothing in life."
Muhammed Ali, former boxing world champion (b. 1942)
To date, the 4-5 biggest of Japan's trading companies have been treating from the hedge fund business. In their hey day, Japanese trading companies managed either directly or indirectly approximately US$8-10 billion of hedge fund product and brought it over to Japanese investors. Many of the these companies also invested (and some still do) on a proprietary basis in hedge fund strategies.
But the short term performance losses and redemption pressures from Japan-bsed investors have forced senior management in many of these firms to make an about face - in many cases to dump the same business model that they had built up since 2003/04.
By some accounts, Japanese institutional investors have put in 30%-40% redemptions with FoHF and single managers in 2008. The sudden and shocking appearance of "gates" and the move by some firms to imposee additional lock-ups sent many of them out, and potentially for good. At the very least it kepy up European and U.S. based operations to handle the Tokyo requests for clarity of what is going on in hedge fund land!
The fact of the matter is that Japanese institutional investors and many of their disrtributors are rotational investors. That means that they follow the "hot hand" in terms of strategy and manager. As investors you do not get rewarded for making good investment decisions, but you od get punished (by being sent to some remote regional posting) for bad investment decisions which means that the incentive system is also screwed up.
One such "victim", a prominent Japanese trading company has effectively shut down its business seeding 6-8 managers out of New York. In the old days they would try to find and negotiate equity on a one-for-one basis in return for US$20 million investment in the fund and in the firm (for operational fixed costs). The Japanese partner also marketed the returns to Japanese investors through its brokerage network back in Japan.
A similar pressure to streamline and/or retreat is now going on with other larger trading companies. But not all are moving back at the same pace. Mitsubishi is an exception. It has recently bought a stake in a European based finxed income arbitrage manager utilizing a relative value strategy. At the same time it is believed to have pulled somewhere in the order to US$200 MM from an existing investment that it had made with the CT seeder called Weston Capital.
Sumitomo has been a seeding manager with US$25-30 Million stakes and is apparently now culling those that "are not working" while focusing on those that are working. This means they are focusing on the positive performers (if indeed they have any of them).
Marubeni has not been doing too much although they were late to the business initially and when they did get involved they were CDO distributors in Japan. Of course that model has gone up in smoke!
The critical issue remains: what will Japanese institutional investors like pensions and some financial institutions do in the months and years ahead with equity markets likely to remain range-bound, the currency remaining strong and bond yields remaining very low? Surely they will have to find "profitable" absolute return product somehow? And where will that supply come from? Mahalo.
posted by Franklin Scruggins | 5:20 PM
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