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April 3, 2007
Japanese say hai to hedge funds
In a country where the majority of household financial assets are squirrelled away in safe bank or post office accounts earning tiny rates of interest, a retail hedge fund market might seem an outlandish proposition, writes David Turner in a special FTfm report.
But in fact a nascent market in alternative investments has emerged over the past few years, though its exact size is hard to pin down.
Industry estimates suggest the mass retail market is Y300bn ($2.5bn) but this excludes the large sums of money that high-net-worth people invest. The public placement market - which includes mass retail, much of the high-net-worth money, and some institutional money, but excludes private placements made for super high-net-worth individuals and large institutional investors - is estimated to be worth about Y1,100bn.
Household investors in hedge funds tend to be affluent but not necessarily super rich, say securities companies. An official at Nomura said typical customers are senior company executives, doctors and lawyers. Most come from the big cities. And these clients are all “relatively young” at 50 or 60, according to Nomura, whereas the average age for mutual fund investors is 60-70.
Some have even embraced the concept, slow to grow so far among Japanese household investors, of investment by portfolio - building a web of poorly correlated assets to achieve a higher return for the same risk.
But Japanese retail hedge fund investors remain conservative compared with some of their US cousins, for example. Almost all the Mitsubishi UFJ products are principal-protected. A Nomura official says the group’s most popular retail product is a multi-strategy fund of hedge funds, “which controls downside risk very carefully because real high net worth individuals tend to avoid downside risk”.
Nomura’s hedge funds are, in general, designed for high-end customers. The normal minimum subscription amount is between Y10m and Y30m, depending on the fund. “This is not a product for mass retail investors”, says a Nomura official.
Mitsubishi UFJ Securities takes a more populist tack, which has helped it to take the top spot in market share. The average investment in Mitsubishi UFJ Securities’ hedge fund products is only Y7m, with a typical minimum amount of Y3m. Its Y480bn total is almost 17 per cent of its total assets under management.
Among the big hedge fund providers, interest is showing no sign of waning. Nomura placed Y90bn with investors last year, and Mitsubishi UFJ Securities has an aspiration that hedge funds will reach 20 per cent of its total assets.
So far, so good, for Japan’s retail hedge fund market - but how long will interest last? It is not yet clear whether Japanese investors are treating hedge funds as an attractive fad at a time when domestic investments do not appeal, or a hardy perennial within their portfolios.
A Nomura official says: “Japanese investors’ interest depends on the performance of Japanese equities. If the performance is very very good, they will be less interested. They will think hedge funds are boring.” [So given the consistently underwhelming performance of Japanese equities, hedge funds ought to be very interesting through the foreseeable future]
But Daiwa, which is not a big operator in the market even though it is Japan’s second biggest securities house, is sceptical about retail investors’ interest in hedge funds. Toru Yaguchi, consultant in the fund research department of Daiwa Fund Consulting, says private investors prefer “high dividends, and high-frequency dividends”.
His theory is supported by the runaway success of Nomura’s My Story fund, a mélange of bond and equity investments paying out dividends six times a year, including large bonus dividends in January and July. Since the fund opened in May 2005 it has built up a huge net asset value of almost Y1,500bn.
But even Mr Yaguchi admits hedge funds could gain a powerful boost among retail investors if companies can come up with “a novel concept” - akin to the global macro fund launched by Goldman Sachs in Japan in 2004, which kick-started that market for retail investors.
Hedge fund providers will surely take up the challenge.
Posted by su at April 3, 2007 3:43 PM