Financial Risk Management (FRM), the London-based manager of funds of hedge funds, is raising up to $100 million for a new strategy dedicated to Japan-focused managers.
This is a change of pace for FRM, which says it has the biggest market share in Japan for funds of hedge funds, but for international strategies.
That market share is thanks to a distribution relationship with Mitsui Sumitomo Trust Bank, and contributes a significant share of FRM’s global assets under management.
Motoyuki Sato, director of manager research in Tokyo, says he noticed an anomaly among hedge funds, using the firm’s proprietary database. Japan-focused market-neutral or non-biased equity strategies have consistently outperformed peers in the US and Europe, he says.
The Japanese stock market is overweighted towards a number of sectors where returns and earnings diverge markedly among companies. This includes capital goods, consumer goods and healthcare, among others.
In contrast, Japan’s market is light on sectors where corporate results tend to herd together, such as financials and oil.
On top of this is a dearth of sell-side research, which gives an edge to those on the buy-side willing to do their own digging. And borrowing costs for Japanese stocks are affordable, making execution on shorts reasonably efficient.
Finally, Sato has noticed that, on balance, Japan-focused managers are generally not very good at global macro-type strategies, because there is insufficient information and experience of this sort in Tokyo, but they are very good at micro research and drilling down to understand individual companies.
FRM had a Japan-oriented fund of funds before, a relative-return product benchmarked against Topix, but the strategy was later shut down, but Sato's research suggested the local market structure could be exploited to generate absolute returns that would appeal to investors.
He pitched the idea both internally and to Mitsui Sumitomo, and now FRM is selling the new strategy, the FRM Japan Equity Long Short Alpha Focus Fund, to local pension funds. If the fund hits its asset targets and performs well, FRM may market it to global investors as well.
The seven underlying managers are a mix of domestic and offshore Japan managers, including both native Japanese and foreign firms. These include fundamental long/short equity strategies and trading strategies, including high-frequency or prop-desk shops. FRM may add a few more managers, over time, if it raises additional assets.
The target return is 5-10%, with volatility targets of 3-5%. Backdating the strategy to 2004 reveals an annualised return (net of fees) of 5.68% with annualised volatility of 4.08%. For the first quarter of 2012, the strategy is up 3.12%, although Topix is up 14.8%.
FRM is charging a 1% annual management fee and a 10% performance fee. It has mandated Citco as its administrator, JP Morgan as custodian and Ogier as legal counsel to the fund.