The HSBC/Hedgeweek Market Review Series: Japan: Hideki Hashiguchi, Lead Representative, Tokyo, HSBC Alternative Fund Services
Hideki Hashiguchi outlines recent developments in the Japanese hedge funds market, including the size and strategies of new fund launches and investor preferences.
HW: What is the background to the setting up of the Tokyo office?
HH: HSBC (formerly Bank of Bermuda) provides fund trustee, administration and custody services globally. Within Asia Pacific, we have provided these services out of Hong Kong since 1974 and Singapore since 1993.
Japan is an important market for us to develop because of the number of business opportunities we have from existing clients. In the past, I used to visit clients, prospects and other service providers from Hong Kong once a month.
However, as we became more established and business developed, we felt we should provide more client-oriented services in Japan. Therefore, in August 2003 we took the decision to set up an office in Tokyo. The structure we have in place is one whereby I build client relationships locally and provide support to clients in the market in which they are based, whilst the servicing is conducted out of our Hong Kong operation to leverage their skill and expertise in this area.
HW: What is the average size of fund launches in the Japanese market?
HH: The average size of start-up hedge funds launched in Japan is between USD5 million and USD10 million. However, the average size of a fund of funds is between USD40 million and USD80 million.
The number of start-up funds is increasing because of investor demand from the US and Europe - this has also meant an increase in the size of start-up funds.
HW: What types of strategies are being launched?
HH: Equity long/short is still the dominant strategy, however, event driven and multi strategy funds are also on the increase.
We have seen a gradual increase in appetite for strategies other than long/short equity from Japanese and fund of funds investors. This is promising for the development of the Japanese hedge fund industry in the long term.
HW: Who is launching these strategies?
HH: We are currently seeing many start-up funds where the managers are former heads of sections on proprietary trading desks from foreign brokerage houses or experienced fund managers from large institutions who want to create and control their own funds.
HW: What types of fund structures are being launched?
HH: Master-feeder structures tend to be the current standard within Japan utilising LLC companies in various parts of the world as the feeder funds. Fund of funds structures are used frequently and this trend is likely to continue. The principal protected fund of funds is popular in Japan. The fund consists of (a) the guaranteed part, which invests in zero coupons and (b) a non-guaranteed part, which pursues absolute returns.
HW: How strong is Japanese investors' appetite for alternative strategies
HH: Our clients are seeing a great deal of demand from investors for alternative products. Generally, they invest in equity long short and multi strategies, followed by convertible bond arbitrage strategies. Currently investors are also showing an interest in event driven strategies. There has not been significant interest in global macro recently.
HW: Have there been any recent regulatory changes in the market?
HH: Yes. The paid up capital required to apply for a discretionary license was lowered to JPY50 million (USD454,000) from JPY100 million (in USD908,000). This has encouraged more start-up managers to consider taking a full discretionary license. Also, the Kanto Financial Bureau advised that from the middle of 2004, funds domiciled in the Cayman Islands or Bermuda and registered in Japan should follow Japanese GAAP or US GAAP accounting standards instead of IAS (International Accounting Standard).
HW: What are the institutional investment trends in the region?
HH: Institutional investors are allocating more assets to alternative products, especially hedge funds and fund of hedge funds in Japan. A number of good performing funds have been closed or soft closed to investors. Therefore, we have seen investors turning their attention to start-up managers and investing their assets if the managers have good reputations. Managers now expect to see a percentage of institutional investment into their funds. Prime brokers are actively acting as the capital introduction in the region.
Japanese Corporate Pensions are allocating assets to alternatives especially hedge funds. This differs from other markets such at the US and Europe where pension funds have predominantly invested in fund of funds. Japanese brokerage houses have been distributing principal protected fund of hedge funds to retail clients and fund of hedge fund managers are distributing their funds to Corporations and Regional Banks. We are expecting this trend to continue for the foreseeable future.
HW: What is HSBC's competitive advantage in the Japanese market?
HH: HSBC has a very strong name and a wide range of banking services to offer this market. Bank of Bermuda built up a strong reputation locally and as HSBC we continue to strengthen our position. We have technically skilled and experienced staff across Asia so that clients can receive professional service in the same time zone, and we will shortly be offering specialist Japanese support services.
HW: What is the market outlook for the next six months
HH: It is very exciting There are many start-up managers coming into the market and they are now showing relatively good returns.
Investors are visiting the managers in Japan, even from overseas, and deciding to invest into Japanese equity long short funds and other strategies. At the same time, both fund of funds managers and investors are looking for single hedge fund managers and this is a sort of treasure hunt for them.
There are a limited number of fund of funds currently launching or soon to be launched. These funds will be targeted at Corporate Pensions, Regional Banks and high net worth individuals in Japan.
Investors are becoming increasingly more familiar with alternative products and managers are becoming more familiar with investors' interests. Other than hedge funds and funds of hedge funds, private equity funds are another product in which investors are showing a strong interest.
The regulation of partnerships will be changed (Partnerships will be recognised as Securities) and the demand for launching funds and investing in partnerships will grow.
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