Orix Hedge Fund Strategy - Ambitious or Misplaced?

"If little dreaming is dangerous, the cure for it is not to dream less but to dream more, to dream all the time."

Marcel Proust, (1871-1922)

Interestingly, it takes a Japanese leasing company to voice an ambitious hedge fund strategy, transforming its role as a distributor of a U.S. hedge fund into one of owner and emerging manager promoter.

Orix is no stranger to the hedge fund business as it has proudly boasted as being one of the earliest Japanese institutional investors in some of the biggest and oldest firms like Tudor, back in the mid-1990s. Their interest was a means to secure absolute returns from proprietary funds at a time when Japanese fixed income rates already low and falling while long-only equity investments were volatile.

Next, Orix got into the seeding business - choosing to focus on Japan and Asian strategy managers. Nice. That turned out to be a miserable failure. It seems that someone forgot to understand the power of correlation in a relatively concentrated portfolio. The company retrenched, co-investors fled and senior experienced managers were reassigned next window seats! This was sad. It marked a lost opportunity.

Orix decided to lean on an existing U.S. relationship with Mariner. This is a firm that has single strategies, fund of hedge fund strategies and a seeding vehicle for emerging managers and strategies. The typical profile of Mariner stresses low volatility and steady returns (except for 2008) that many think could be a useful and critical component for the investment world in Japan.

Orix wants to double AUM from $10 billion to $20 billion in 5 years. This implies a +20%

growth rate each year. There are very few firms with a strict alternative investment focus that have achieved this since 2007. The only types of firms that have managed very high growth rates have had low starting AUM, a solidly compelling strategy/niche, long-only strategies which are low cost or some special distribution prowess.

In my opinion, Mariner is not the firm that fulfills any of these goals. Performance has not been outstanding/notable, there are no compelling strategies (such as private equity or real estate or emerging markets), no long-only products (a feature of AQR) and certainly no distribution expertise, for example, into Japan's pension find market. For these reasons, I expect the relationship between Mariner and Orix to become strained as the existing product line does not solve existing problems.

Orix should focus on sorting out its real dilemma. That is establishing a stronger and deeper distribution platform into the Japanese market. To do so, they might be best suited to strike a deal with an asset management company, agricultural cooperative, a city bank or somehow with a pension consultant. Existing relationships will not do the trick.

Japanese institutional investors are seen as net sellers of hedge fund produce due to costs, poor performance in 2008/09, poor transparency and the imposition of gates (lack of liquidity). Orix would be best served developing a scalable money market fund that is liquid, performs better than regular money markets, and that does not have currency risk. They should also focus on infrastructure and real estate projects in Asia, as well as creating a vehicle to invest in natural resources such as through a private equity fund where the returns would be significantly higher than with a FoHF.

All of the above would assume that Orix senior management understand the real needs of Japanese institutional investors, the lack of value in a HFoF business as well as how they need to "fix" their investment management business.

Ultimately, they need to have a separate organization - perhaps via an IPO rewarding management along western lines and not as "glorified salarymen". If they are not quick to see these issues this will be yet another failed attempt by Orix to build a business, that they will fold and collapse away in 4 years. Ambition misplaced? It sure looks like that. Mahalo.