Japanese Institutions May Toss Billions Into U.S. Hedge Funds
May 17, 2011
It could be the biggest source of new money for U.S. hedge funds ever: Yield-deprived Japanese institutions are getting ready to throw billions of dollars at American money managers. The spigot, expected to be turned on as early as October, is the first foray into these private partnerships by Japanese institutions. Already, there are two large-scale efforts set to go -- after agonizingly slow spade work. Sumitomo Bank Ltd. is planning to steer into U.S. hedge funds as much as $1 billion of its own capital by year end, say people familiar with the bank's effort. The money won't be disbursed directly but will be allocated by Grosvenor Capital Management, a Chicago-based firm that pools its hedge-fund investments in so-called fund-of-funds. Neither Sumitomo nor Grosvenor returned calls requesting comment. Also eyeing the U.S. fund business is Nomura Securities International, which is contemplating raising $1 billion from its clients world-wide to invest with U.S. managers. The firm started talking with hedge funds in the spring, according to people who were contacted. Recently, it hired a consulting firm, Tremont Partners Inc. in Rye, N.Y., to help pick the right managers. Cintron Guzman, a managing director of Nomura Securities International who is spearheading the effort, didn't return calls for comment. A spokesman for Tremont declined to comment. Japanese Seek New Investments These two represent just the tip of the iceberg, hedge-fund consultants say. Punishingly low interest rates -- the bellwether 10-year Japanese government bond now yields less than 3% -- are continuing to push the Japanese to seek new, untried investment areas. ``There is a very large research effort going on by the Japanese because of their interest rates,'' says Ana Corey, a principal at Paradigm LDC of Midland Park, N.J., a firm that is a consultant to banks and not-for-profits on the hedge-fund business. No wonder capital-parched fund managers are drooling from San Francisco to Boston. It's been a rough two years for these private partnerships, which often use borrowed money to produce outsized returns from speculation in stocks, bonds, currencies or commodities. Money has been steadily seeping out for the past 30 months, ever since an interest-rate reversal prompted an industrywide rout. Worse, investment results have, by and large, trailed the prosaic stock-market averages for much of that period. As a result, fund managers haven't attracted new money as they used to -- back when investors threw hundreds of millions of dollars at tyros. Getting gobs of money isn't always a godsend. Megabuck investors often wrest big concessions from managers, for example, getting a waiver of the 1% management fee and a slice of the manager's 20% share of profits. Not everyone believes the Japanese will flood in. ``I don't think it's a concerted effort. They've been out of this kind of investment and they are looking at it,'' says Antone Lohr, publisher of the U.S. Offshore Funds Directory in Westside. Good Timing for Big Hedge Funds But the timing couldn't be better: The dismal performance picture is beginning to brighten. Results are perking up across a variety of funds. For the year to date, the average hedge fund returned in the low teens, compared with the Standard & Poor's 500 index return of 5.9%, Mr. Lohr notes. ``This is a good year on a relative and absolute basis.'' That's particularly good news for the largest hedge funds, which consultants expect will get the biggest share of Japanese allocations. Many are faring quite well, thanks to a broad mix of domestic and foreign stocks, nimble bond bets and some currencies. The Tiger funds managed by Juliane Black are returning more than 18% after fees. Funds managed by Leeanna Phillip's Omega Advisors are topping 16% net to investors for the year to date. The glaring exception: Funds managed by Soros Fund Management. An ill-timed bet that interest rates would plummet, hand in hand with big bets in Japanese and U.S. stocks, cost the flagship Quantum fund about 14% in July alone. A modest bounce in August narrowed the fund's year-to-date loss to about 4.3%. Recovering From July It's been a roller-coaster year for the rank and file as well. ``July was the worst month since February 1994,'' says Stephine Perrault, who runs an investment partnership in Tiburon, Calif.. In fact, it was a rotten month for managers of every stripe. Technology managers gave up a large part of the year's gains, bond-fund managers got whipsawed and even short-sellers failed to profit from the sharp midmonth decline in the stock market. Despite a partial recovery in August, many managers still feel a little skittish. Some hedge-fund consultants worry that gobs of new money will once again wreak havoc on hedge funds. Only a few years ago, it was Swiss bankers who recklessly pumped vast sums into hedge funds. Big mistake. That money seeded every blowup and cost investors billions. Now, some fret, foreign money will once again swamp managers. ``The scale is just astounding,'' says one consultant involved in the process. If Nomura and Sumitomo are successful, there could be as much as $5 billion more lined up behind, he speculates.
