A Long-Lost Asia Hedge Fund Hub Is Emerging From the Shadows

(Bloomberg) -- It’s more of a trickle than a flood, but the hedge-fund crowd is slowly returning to Japan.

In Tokyo, a city relegated to the status of hedge-fund backwater over the past decade as managers opted for Hong Kong and Singapore, at least eight firms have started up over the past 12 months, according to Nomura Holdings Inc. Not since 2014 has Japan seen a year with more than five launches, data from researcher Eurekahedge show.

Score a victory for Tokyo officials’ activist mindset when it comes to attracting alternative asset managers. They’ve whittled down what was previously a notoriously cumbersome registration process to just a few months in some cases, easing the burden for fund startups operating on increasingly tight budgets.

It is, in some ways, a match made in heaven: Japan is home to one of the largest pension pools in the world, one that’s increasingly desperate for returns amid near-zero yields at home and an aging population. That’s providing a rare opening for hedge fund managers bruised by outflows and pressure on fees.

“We’re seeing the re-emergence of Tokyo as a center for Japan-focused funds,” said Dan McNicholas, the global head of capital introductions at Nomura. “The main draw has been the government’s push to encourage boutique asset managers to set up there. Another is funds’ ability to raise money locally to pursue domestic investment opportunities.”

Tokyo’s Wall Street

Tokyo Governor Yuriko Koike has been loosening regulations and has vowed to reform taxes in a bid to reclaim the city’s former glory as a global financial hub. She said in December that she wanted to build Tokyo’s “Wall Street,” complete with what she termed a “multi-lingual system.”

The time it takes for funds to register in Greater Tokyo has been cut to around four or five months in some instances, from as long as two years. The city has also promised an emerging-manager program to help pay for some of the initial expenses of qualified new firms, McNicholas said.

Masahiko Hashimoto, the chief executive of Red Phoenix Investments, traded the famed beaches of Hawaii for the bustling streets of Tokyo’s Shinjuku district. The fund, which will employ what Hashimoto calls a “data-driven” long-short strategy focused on Japan, got its license in February and hasn’t raised any money yet.

“I came to Japan from Hawaii to start something fun, and also because it was hard to get a U.S. visa after my partner retired,” said Hashimoto, who was raised in Canada and had set up a proprietary trading firm in Hawaii to trade Japanese government bonds. “There were people who wanted us to manage money, so I applied for a license.”

Other new hedge funds calling Japan home include Schweitzer Investment Co. and Bushido Asset Management Co. Michael Gelband’s ExodusPoint Capital Management LP, meanwhile, plans to open an office in Japan and ramp up hiring in Asia, people familiar with the matter said last week.

About 5.4 percent of Japan’s 79 trillion yen ($709 billion) in corporate pension money was allocated to hedge funds as of March 2018, data from the Pension Fund Association of Japan show. By way of comparison, Yale University’s latest annual report shows its allocation to hedge funds jumped to 26.1 percent as of June 2018.

The predicament facing Japan’s lumbering pension giants -- they have to generate returns for one of the fastest-aging societies in an era of depressed domestic bond yields -- means they’re less inclined to haggle about fees.

“Fees are clearly not a major concern right now for Japanese pension investors,” said Ed Rogers, CEO of Rogers Investment Advisors KK, a Tokyo-based adviser to both hedge funds and investors. “Their major concerns are that their portfolios need to generate more income and more return.”

Data from Eurekahedge show that performance fees for Japan-based hedge funds average 19.45 percent, close to the level that’s long been considered the industry standard. That’s about two percentage points higher than global performance fees in a survey published by Deutsche Bank AG last month.

Yale Model

Around 80 percent of pension funds in Japan are so-called defined benefit plans. They park most of their assets in low-yielding Japanese government bonds and are struggling to keep up with the promised payments to retirees as the workforce shrinks. Many of them are moving to copy the Yale University endowment model, where a significant portion of assets is allocated to non-traditional classes such as private equity or real estate.

While the uptick in new managers makes Tokyo stand out in a subdued global startup scene -- 2018 was the slowest year for hedge-fund starts worldwide in almost two decades -- the city has some ways to go before achieving true hedge-fund hub status.

Japan-focused funds commanded almost one-third of industry assets in Asia as late as 2005, only for that share to hover near 10 percent over the past decade. A diaspora of Japan-focused managers have put down roots in Singapore and Hong Kong to skirt historically onerous administrative and tax burdens.

That said, Tokyo’s shifting emphasis toward luring startups rather than just big global firms may be planting the seeds for a longer-term recovery.

Minoru Takatsu, the CEO of Schweitzer Investment, said reduced red tape was just one of the factors that convinced him to set up shop in Tokyo. Being based there makes it easier to cover Japan’s vast universe of small- and mid-cap companies, he said. Schweitzer’s long-short hedge fund started trading in May last year and the firm has five employees.

“When I spoke to investors about setting up a fund, questions always arose from the foreign ones over whether small-to-mid caps are manageable to cover from Singapore or Hong Kong,” he said. “Plus it’s easier to hire talented people in Tokyo because often they want to remain here.”

To contact the reporters on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net;Komaki Ito in Tokyo at kito@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net, Philip Lagerkranser

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