Japan Post Bank plans tenfold growth in alts, hedge funds

Japan Post Bank plans to continue bumping up its investments in hedge funds as part of a broader push into alternatives to boost returns.

That's according to Naohide Une, managing director and head of of the group's strategic investment department, speaking last week at the AsianInvestor Southeast Asia Institutional Investment Forum in Singapore.

“About half of the current asset allocation in alternatives is in hedge funds," Une said at a panel discussion on Thursday (December 7).  

Earlier this year, the institutional investor made clear it plans to boost its $7 billion alternatives asset allocation by a factor of almost 10, which Une reiterated at the panel discussion.

Its alternatives assets include private equity funds real estate funds and hedge funds.

The build-up in hedge fund investments comes amid a backdrop of a turbulent 2016, when net outflows totalled $70 billion for the hedge fund industry, according to industry tracker HFRI. This year, there has been muted but postive flows.

Japan Post Bank has $1.85 trillion in assets under management and has roughly 40% in what it calls its 'satellite portfolio', which contains foreign assets, mostly government bonds and credit instruments but also some alternative assets.

The institution’s investment strategy consists of a base portfolio that aims to ensure stable profits by investing mostly in Japanese government bonds and the satellite portfolio that pursues excess returns.

The satellite portfolio stood at $643 billion at the end of September 2017 and around $7 billion—just over 1%—is invested purely in alternative assets, Une said.

The projected 10% allocation to alternatives isn’t especially high compared with some of Japan Post Bank's international peers. However, in absolute terms—at $60 billion to $70 billion it is highly significant, Une said, noting how the Japanese institutional investor has built up its alternatives investments from almost scratch in the past two years.

In the 12 months to September 2017, alternative investments at the Japanese institutional investor have soared by more than 1,400% in yen terms, Japan Post Bank data shows. 

As elsewhere, but particularly pertinent in Japan, one of the big drivers behind the shift into alternatives—and other global—is the lower interest rate environment.

That was highlighted in Japan Post Bank's 2017 annual report: “Due to persistent historically low yen interest rates, investment gains from the base portfolio are tapering off, and we have aggressively shifted towards global asset allocation [included in satellite portfolios].”

Hedge funds

It is a sentiment that resonates with other large investors, according to Caroline Wirth, head of senior marketing and sales at hedge fund manager Ayaltis.

“We are definitely seeing more interest from pension funds and even family offices and wealthy individuals in hedge funds,” Wirth said at the same panel.

With traditional equity markets performing so spectacularly this year it’s tough to make the investment case for hedge funds, which have had a troubled few years and drawn some investor disdain due to their high fees. Hedge funds have performed with some merit this year, nonetheless.

While the S&P 500 was up 18% to the end of November, the widely tracked hedge fund HFRI weighted composite index is up around 7.5%.

Wirth said the strong performance of public equities could prompt investors to allocate more to typically uncorrelated assets such as hedge funds. “There is a realisation that with global indices such as the S&P 500 at these valuations, they might not go up any higher,” she said.

However, it is important to choose the right hedge fund strategy, she said, as the dispersion in returns can be very significant.

What you don't want either, Une said, is just another equity strategy, albeit with much higher fees, given how some HFRI indices are strongly correlated to global equity benchmarks.

“Our hedge fund portfolio’s correlation to equities is 0.5, since we invest in different strategies such as macro, relative value and quantitative strategy funds,” Une said. 

Correlation measures the degree to which two securities/variables move in relation to one another. Its value falls between 1 and -1. A correlation co-efficient of 1 suggests both securities move in the same direction, while -1 means both securities move in opposite direction.

Overall, global sentiment towards hedge funds remains mixed.

According to a November 2017 global hedge fund and investor survey by Ernst and Young, a quarter of North American institutional investors expect to reduce their hedge fund allocations in future. Investors outside of North America are more upbeat, with 20% of them expected to increase their allocations and the remaining 80% expected to keep them flat.

The survey tracked hedge funds representing about $1.3 trillion in AUM and institutional investors who had allocated about $260 billion to hedge funds.