Japan pensions bet on hedge funds to boost returns

TOKYO Wed Jun 22, 2011 4:02am EDT

Tamotsu Adachi, Managing Director and Co-Head of Carlyle Japan Partners, attends at the Reuters Rebuilding Japan Summit in Tokyo June 20, 2011. REUTERS/Toru Hanai

Tamotsu Adachi, Managing Director and Co-Head of Carlyle Japan Partners, attends at the Reuters Rebuilding Japan Summit in Tokyo June 20, 2011.

Credit: Reuters/Toru Hanai

TOKYO (Reuters) - Japan's corporate pension funds, hobbled by a sluggish domestic stock market, are raising their allocations to hedge funds as they scramble to boost returns for the country's aging population.

The move is part of a broader trend in Asia where institutions are looking to raise exposure to hedge funds in search for absolute positive returns and as confidence in the asset class improves, lifting prospects for the $2 trillion global hedge fund industry.

Nearly all of Japan's corporate pension funds, which collectively manage more than $900 billion, have lowered their guaranteed yield in the last decade from about 5.5 percent to below 3.5 percent on average, industry observers said.

"Considering that they have had a very hard time raising decent returns by directly investing in equities over the past years, pension funds are now very seriously considering taking more exposure in alternatives," Tamotsu Adachi, the co-head of private equity firm Carlyle's Japan unit, told the Reuters Rebuilding Japan Summit in Tokyo this week.

A survey of 31 Japanese corporate pension funds by U.S. fund manager Russell Investments showed pensions slashing investment in domestic equities to 14.6 percent of their assets on average as of end-March from 18.7 percent a year earlier.

By contrast, the 31 pension funds, which manage 7.54 trillion yen ($94 billion), said they had increased allocations to hedge funds and other alternative assets to 13.1 percent of their assets from 11.6 percent a year ago.

"In these conditions where Japanese pension funds are having trouble finding a return driver, they have to rely more on alternative assets, mainly hedge funds," said Mitsuhiro Arakawa, executive consultant at Russell Investments.

"They don't want to be in stocks after seeing them slump over the last 10 to 20 years. In fact, they may want to cut them at a quicker pace after the disaster in Japan," Arakawa said.

The blow of the March 11 earthquake and tsunami and ensuing nuclear crisis knocked the Japanese economy into recession and battered stocks. Japan's benchmark Nikkei average .N225 is still down about 7 percent since the earthquake.

Some corporate pensions are aiming to park as much as 40 percent of their assets in hedge funds, said Futoshi Ago, director at the prime brokerage arm of Bank of America Merrill Lynch in Tokyo.

Takahiro Mitani, president of the Government Pension Investment Fund, told the summit that while he had no plans to start investing in hedge funds immediately, the fund was evaluating the option. The GPIF, which holds about $1.4 trillion in assets, is known as a conservative fund that parks about two-thirds of its assets in Japanese government bonds.

GROWING TREND

The Nikkei stock average has lost about a third of its value in the last 10 years. By comparison, the Eurekahedge Hedge Fund Index has surged 160 percent, forcing institutions to rejig their asset allocations.

While Japanese corporate pension funds have kept their allocations to foreign stocks at around 20 percent of their assets in the past decade, they have cut their exposure to domestic shares by half. Investments in alternatives have risen to 13 percent from less than 3 percent.

Across Asia, institutions are preparing to invest more or are looking to start investing in hedge funds, after shying away from the asset class, as an uncertain economic outlook forces them to look at instruments that could benefit from falling markets.

South Korea's National Pension Service, the world's No. 4 pension fund with about $300 billion of assets, said earlier this month that it plans to raise its investment in alternatives to above 10 percent by 2016 from 5.8 percent in 2010 as a part of its move to diversify.

The industry has also received allocations from Chinese, Taiwanese and Malaysian institutions among others in Asia with more likely to join the fray.

"The market is far more ready now to make allocations to hedge funds. Clearly I think that the large institutions are setting the path for others to follow," said Max Gottschalk, co-founder of Gottex Fund Management (GFMN.S), one of the world's biggest fund of hedge funds.

Only about 18 percent of global hedge fund assets are sourced from Asia, according to a Credit Suisse (CSGN.VX) survey of 600 institutional investors representing $1.2 trillion of allocations to single-manager hedge funds.

"I think we are still in the early phase of adoption to alternatives in Asia and I think over the next 5-10 years Asia will become a far more prominent investor in this asset class," said Gottschalk who moved to Hong Kong earlier this year. ($1 = 80.270 Japanese Yen)

(Editing by Chris Gallagher)

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