Challenges for the Japanese Hedge Fund Industry in 2013 – December 2012

by Ivan Jincheng Han

  • 06 Dec 2012
  • HF

2012 is proving to be a challenging year for the Japanese hedge fund industry, with a number of scandals unfolding following insider trading investigations conducted by Japan’s Financial Services Agency (FSA) into a range of firms. In particular, AIJ Investment Advisors's highly publicized misreporting of performance to cover up over $1bn worth of losses has created uncertainty within the Japanese hedge fund industry.

As well as impacting investor confidence in the asset class, these investigations have also led to a widespread evaluation of the regulations governing the hedge fund industry in Japan. New regulations, which will tighten the FSA's control over investment managers and increase accountability through transparency of fund management teams, are still being assessed and Japan-based investors in the asset class are monitoring the situation closely. This is especially true for Japan-based pension fund managers, many of which lost a significant proportion of their pension assets to the AIJ Investment Advisors fraud.

Japan-based investors are one of the most prominent groups of hedge fund investors in the Asia-Pacific region, making up 32% of the regional total number of hedge fund investors. Pension funds, the group most publicized as being affected by the AIJ scandal, are a key institutional investor group in the country, making up 52% of all Japan-based investors that actively invest in hedge funds or are considering doing so. This means that changes in the regulatory environment, coupled with a degree of wariness among pension funds in Japan to reallocate capital to hedge funds, is leading to a change in the Japanese hedge fund climate, which could potentially impact the Asia-Pacific hedge fund landscape overall.

Despite the uncertainty concerning Japan’s hedge fund industry, there are signs of optimism for managers looking to raise funds from these investors in 2013. Preqin’s Hedge Fund Investor Profiles database indicates that a significant proportion of Japanese institutional investors are actively seeking to add new hedge fund allocations to their investment portfolios over the next 12 months. With over 50% of hedge fund investors in Japan seeking investments globally, Japanese institutional investors could still be an attractive source of capital for hedge fund managers across the globe.

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