Japan Hedge-Fund Startups Rise as Prop-Traders Emerge

The number of new hedge funds investing in Japan is set to reach the highest since 2006 as global banks consider closing their proprietary trading units.

As many as 27 Japan-focused hedge funds may begin trading this year, with 15 already open, said Rory Kennedy, chief operating officer at Rogers Investment Advisors K.K., which tracks about 170 funds investing in the nation. They include R-SQUARED Master Fund, managed by a former Goldman Sachs Group Inc. proprietary trader, and Orix Commodities Fund, which uses computer programs to invest in commodities futures.

Assets managed by Japan-focused hedge funds, the world’s worst performers, have dropped 65 percent to $13.6 billion from their peak in 2006, according to Eurekahedge Pte, as more than half employed equity-related strategies hit by the nation’s declining stocks. Former proprietary-desk traders are setting up many of the new funds as the U.S. implements the Dodd-Frank financial-overhaul act that prohibits banks from risking capital by betting for their own accounts.

“The trend of more proprietary traders leaving their firms to set up their own funds is likely to quicken in the years to come,” said Hideki Hashiguchi, a managing director for Japan at ABN Amro Fund Services (Japan) Ltd. in Tokyo. “Experiences and track records that ex-prop traders have will be especially significant in a market like Japan.”

Worst Performer

In 2009, there were 25 hedge-fund startups in Japan, according to research by Tokyo-based Rogers Investment. There were 20 each in 2008 and 2007, and at least 35 in 2006, when the firm was founded, Kennedy said.

The Eurekahedge Japan Hedge Fund Index returned 1.1 percent through September, the worst performer among six regional hedge-fund indexes. That compares with a 5.1 percent gain by Eurekahedge’s global hedge-fund index and a 7.8 percent decline by the Topix index, one of Japan’s equity benchmarks.

Assets managed by Japanese funds peaked at $39 billion in April 2006, according to Eurekahedge.

Some funds are managing to raise more than $100 million from investors, signaling demand for managers who are able to provide returns that beat the overall market. The average raised by Asian hedge-fund startups this year is about $12.2 million, according to Eurekahedge.

‘Number One Challenge’

“Although there is an increase in the number of new hedge funds, availability of capital continues to be the number one challenge facing startups,” said Skip Hashimoto, the Japan representative at Ogier Fiduciary Services in Tokyo, which provides administrative services to hedge funds.

Proprietary traders opening hedge funds should provide a greater variety of strategies for investors and may help increase the overall availability of startup capital, Hashimoto said.

Einoshin Arima and Giselle Leung, former proprietary traders at Mizuho Securities Co., raised about $120 million with money from institutional investors in Asia for a new hedge fund that started on Sept. 1. The Hareion Fund returned about 5 percent since inception through Oct. 8, beating the 3.5 percent gain by the Topix in the same period.

The so-called Volcker rule added to the U.S. financial-overhaul package is an attempt to limit risky trading and investing by depositary institutions after the worst financial crisis since the Great Depression culminated in an unprecedented level of government support for the banking system.

Volcker Rule

Goldman Sachs is disbanding its principal-strategies business, one of the groups that make bets with the firm’s own money, to comply with the new U.S. rules, two people with knowledge of the decision said last month. JPMorgan Chase & Co. plans to close its prop-trading units in response to the law, signed by President Barack Obama in July.

“U.S. securities firms will have to comply with the Volcker rule even in their Japanese activities,” said Tomoaki Ikenaga, a partner at law firm Anderson Mori & Tomotsune in Tokyo, who specializes in the financial industry. “With the limitation on prop-trading in the U.S., liquidity will likely decline in the market, and investors will seek other markets, leading to possible moves by hedge funds to Japan and Asia.”

Kenji Miyamoto, a former proprietary trader at Goldman Sachs in Hong Kong, said he is planning a new Japan-focused equity hedge fund in the next year, declining to elaborate as it is still under development.

More Strategies

Japanese startups are offering funds with a wider range of strategies, such as event driven and multistrategy with a focus on trading, Rogers Investment’s Kennedy said. That is a departure from funds set up in 2006 and 2005, which mainly favored equity long-short strategies, betting on rising and falling stock prices.

Long-short funds have dominated in Japan because many were started by managers who used to work for major institutions investing in long-only funds, said Kennedy.

They founded their own firms seeking to profit from short selling as the other of Japan’s benchmarks, the Nikkei 225 Stock Average, declined to a quarter of its 1989 peak, he said. Shorting involves selling borrowed shares in anticipation of buying them back at lower prices.

“Many of 2010’s crop of Japan-focused managers generally do not believe that they know better than the markets; they seek to ride the tiger instead of trying to tame it to make money in the world’s most difficult market,” said Kennedy, whose Rogers Investment advises a fund-of-hedge fund that allocates money to managers investing in Japan. “We see this as a positive trend for Japanese hedge funds.”


R-SQUARED Master, a multistrategy fund that invests in securities ranging from equities to convertible bonds, returned 6.3 percent since inception in April through September. The assets of the fund, started by Tan Maruyama, a former proprietary trader at Goldman Sachs, have grown to 1.9 billion yen ($23 million) from 1.36 billion yen.

“There aren’t that many Japanese hedge funds with credit strategies, so that is an advantage for us,” Maruyama said.

The Orix Commodities Fund returned 4 percent since starting in June through September, said Atsuhito Mori, chief trader of the fund run by GCI Asset Management Inc., a Japanese hedge fund, and Orix Investment Corp., the alternative-investment arm of Tokyo-based Orix Corp.

The commodity trading adviser, or CTA, uses computer programs to search for price signals in futures markets ranging from equities and bonds to oil and gold. It aims to increase its assets to 10 billion yen by the end of March 2011 from 4 billion yen at inception, Mori said.

‘Positive Sign’

“We’re talking to several domestic institutional investors and overseas funds-of-funds as potential investors now,” Mori said. “We’re getting some reactions from investors that never knew there were Japanese CTAs, so that’s a positive sign.”

Alithion Japan Fund, run by Akira Yaku and Kentaro Ishizaki, former proprietary traders at Mizuho Securities, returned 1.2 percent through September since inception in July, taking short-term bets on single securities.

It started with 2 billion yen from Tokyo-based trading company Marubeni Corp. and aims to boost assets to 3 billion yen to 4 billion yen by the yearend through money from domestic pension funds and funds-of-funds abroad, Yaku said.

T&D Asset Management Co., which started a long-short hedge fund in June, is expecting to double the fund’s assets to about 2 billion yen next month through new allocations from pension funds, said Tatsuhiko Takeda, a manager for institutional business department at the asset management arm of Japanese insurer T&D Holdings Inc.

“There are some indications that more long-term investors are willing to commit to new hedge funds that have shown a respectable track record and can meet a number of parameters such as risk capability and experience,” said Ogier’s Hashimoto.

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