Japanese Pensions look to Hedge Fund Investing

Following a global trend in hedge fund investing by large pension funds, Japan’s Teachers’ Mutual Aid Co-operative Society will begin exploring hedge funds as a potential investment to diversify risks and increase returns for the fund. According to Bloomberg, the 600 billion yen fund it looking to allocate approximately 100 billion yen of its capital into alternative investments including foreign stocks, bonds, REITs and hedge funds before the end of its 2013 fiscal year. Hedge funds will see approximately 12 billion yen in new investments.

Japanese Funds Following a Global Trend in Hedge Fund Investing

Japan is not the first country to see major pension plans undertake investment in hedge funds. The Globe and Mail reported earlier in September that Canadian pension plans were also looking at the funds to diversify risk in a challenging interest rate environment. Hedge funds are providing the alternative returns, delinked from equity indexes, which many portfolio managers are seeking.

Lower Interest Rates Driving the Switch to Hedge Funds

Portfolio managers for major pension funds or other portfolios with long lived liabilities are always looking for assets without correlation to major stock indices. In the past, this was easily accomplished without much expense by investing in fixed income products. However, as interest rates are currently at historical lows across the curve, portfolio managers need to get creative in how they diversify their portfolio. Long bonds carry significant risk today, and short bonds don’t pay enough for funds to meet certain investment hurdles.

As a result, more funds are considering investing in hedge funds as an alternative. Whether these are market neutral funds, commodity linked funds or funds that employ other strategies, they often offer returns that are not strongly linked to large equity markets. This allows the portfolio manager to see higher returns, while still accomplishing the objective of diversifying away equity risk.

Returns in Asia Falling Short of Expectations

While economic growth in Asia has continued to be strong through the eight months of 2012, the growth isn’t translating into gains for Asian hedge funds. The Eurekahedge Asian Index returned only 1.6 percent to the end of August, which was half of the global benchmark return. This return also trails the 8.2 percent climb in the MSCI Asia Pacific Index, a broad basket of Asian equity indexes across several countries.

However, hedge funds are not meant to track indexes, which is why many funds are considering the asset class for investment. In the truest definition of a hedge fund, it would like underperform the index during bull times and over perform the index during bear markets. While the Japanese pension funds exploring hedge funds should certainly consider better performing global hedge funds, alternatives do exist in Asia that would meet their requirement for diversification away from equities, and also provide more return than fixed income assets.

What does this mean for Job Seekers?

The hedge fund industry certainly has shown some signs of growth over the past few quarters, though the growth has been sporadic and interwoven with cuts in other firms. Competition for new positions remains fierce and those applying should have significant experience in the hedge fund industry or in a related target investment industry. If fixed income returns remain low for an extended period of time, however, more opportunities could become available as portfolio managers look at add return that is not linked to equity markets to their funds.

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