Nissay Asset Management Company, the fund management arm of Japan's biggest insurance company, Nippon Life, has begun marketing its fund of hedge funds to Japanese pension funds and regional banks, says Tadashi Morioka, deputy general manager for international pensions products.

Even Nissay has to fight hard, however, to convince clients that its product is competitive and safe. It intends to invest in 10-20 hedge funds and is relying on Nippon Life's office in New York to help select them. The hedge funds will likely all be from the United States or Europe, and Nissay will fully hedge clients' yen-denominated investments.

For big institutions in Japan, the concept of funds of hedge funds has been around for a few years and many are comfortable with it. But they are not keen to invest in a Japanese gatekeeper's product. (In Japan, funds of hedge fund providers are called gatekeepers.)

For example, Sumitomo Life is a big user of funds of hedge funds, with $4 billion invested. It actively keeps tabs on a universe of around 150 gatekeepers. But Nobuki Yasuda, head of its alternative investment section, says he would not consider using Nissay as a gatekeeper. The reason, he says, is that it won't have the global research and reach of gatekeepers from the US. Furthermore, alternatives offer Sumitomo international diversification, and he is not interested in ones investing in Japan.

Smaller institutions such as regional banks may be more willing to invest with a domestic gatekeeper, and are becoming more interested. But they have difficulty actually investing, says Tetsuo Kushiya, manager of Mizuho Securities' fixed-income business arrangement and development department. Mizuho is one of the biggest distributors of hedge funds in Japan.

Kushiya says regional banks are reluctant to add to their investment risk profile while so many of their current investments are underwater. Furthermore, the hedge fund universe is too opaque. Last, since the Nasdaq crash, hedge fund performance has suffered, and he believes users have become disillusioned with the heady claims of absolute-return managers. "The only way for institutional investors to learn about hedge funds is to actually invest, but senior management is often not easy to persuade," he notes.

These difficulties are evident as Nissay continues to drum up business. It has been marketing its fund of hedge funds since April and is still working to reach its target fund size of $100 million.

But Morioka believes investors will increasingly turn to hedge fund gatekeepers, whose funds have a low correlation to interest rates or domestic equity markets. Furthermore, pension funds in particular face huge pressures as the extent of underfunding in their defined-benefit retirement schemes becomes clear with mark-to-market accounting.

He recognizes that transparency is a major hurdle, particularly for first-time users of hedge funds: "Before starting marketing this product I visited the hedge fund managers, brokers and auditors to understand hedge fund structures and infrastructure. Now I can tell customers that our product is safe."