Several hedge funds in Japan are having to deal with inquiries from nervous clients following the news this week that Japan’s financial regulator was widening its investigation into the alleged disappearance of more than USD2billion in corporate pension funds managed by Tokyo-based AIJ Investment Advisors Co reported Reuters. Just when things were looking promising for its hedge fund industry, which has never really fulfilled its true potential, on expectations that Japan’s pension fund industry might start increasing allocation to alternatives, there are now fears that this news could scare institutions away.

Last Friday the Financial Services Agency shut AIJ for a month. The suspicion is it may have hidden losses in the USD2.6billion pension funds it managed. An executive from one Japanese hedge fund said it will be very tough for managers if pension funds look to big overseas hedge funds or turn to major asset managers like Nomura. It’s certainly an unwelcome development. With only around 5 per cent of some USD800billion in Japanese corporate pension funds invested in hedge funds the potential tickets available could be enormous in its domestic market as institutions battle with rising liability pressures.

It is also believed that the Securities and Exchange Surveillance Commission, Japan’s securities watchdog, is investigating ITM Securities Co, a Tokyo-based broker, over its possible role in the AIJ scandal according to anonymous sources. Apparently most of the pension funds who had allocated capital to AIJ were small pension funds at the lower end of the knowledge spectrum and who relied on track record or word of mouth said Manabu Washio, the CEO of Aksia Asia, a hedge fund research and advisory firm. It remains to be seen what the long-term effects this could have on Japan’s smaller hedge fund manager community.