Japanese fund of hedge funds has a second success

Investor Select Advisors (ISA) has announced the close of the second tranche of the Shinsei Protected Japan Trust, a yen-denominated, multi-strategy fund of funds focused primarily on the Japanese market. ISA created the trust for Shinsei Bank to distribute to its high-net worth Japanese investors. Approximately $50 million has been raised and is now being managed by ISA for the Shinsei.

The Shinsei Protected Japan Trust was launched on February 1, 2003 with approximately $30 million raised during the first tranche in December and January. During the first quarter, the trust outperformed the Topix index by 5% and the Nikkei 225 by 6%.

Continued demand led to the opening of a second tranche in March, and an additional $20 million was raised over a four-week period. This second tranche began trading on May 1.

Nicholas Bullman, CEO of Investor Select Advisors, says, "We believe the high interest in subscriptions is a testament to the multi-strategy fund of fund approach to the current Japanese market."

The Japanese market, which has experienced a 13-year bear run, is increasingly attractive to hedge funds. Over the last several years Japanese companies have been taking steps to improve their balance sheets and valuations have come down to cash levels. Simultaneously, broker coverage of listed Japanese companies has dropped, and the less efficient flow of information has resulted in a good environment for stock pickers with solid proprietary research. Hedge fund managers also benefit from Japan's rising merger and acquisition activity.

"The Japanese market is conducive to hedge funds because of the relatively small number of them operating in the world's second largest equity market and the preponderance of index-related, cross-shareholder unwinding and other Bank of Japan transactions which distort fundamental equity valuations;" says Peter O'Neil Donnellon, Investor Select's managing director for research and investment.

"Any place where market distortions cause mis-pricing and information is scarce, hedge funds will thrive," he adds. "In the last 12 months, the average Japanese equity mutual fund has lost 26%, and foreign investors continue to retreat. Banks and brokerages have scaled down their operations considerably and fewer than one in five Japanese companies now have any research coverage at all. Despite this, the number of Japanese hedge funds has continued to expand from around 35 in December 2001 to over 120 today."

The Shinsei Protected Japan Trust is a diversified portfolio of hedge funds, each fund invested primarily in the Japanese financial markets. The individual hedge funds represent a variety of hedge fund strategies including long-short equity, convertible bond arbitrage, event-driven, and short-oriented blended to produce a portfolio with a targeted eight-10% net annual return and low volatility. ISA is sub-advisor to the Trust and is responsible for the manager selection and portfolio management. The funds in the portfolio will be reviewed regularly with any changes generally being made on a quarterly basis.

The principal of the trust investment is protected to a minimum of 80% with a step-up potential through a guarantee provided by French bank CDC IXIS Capital Markets. CDC will adjust the amount allocated to the trading assets of the fund in order to maintain the 80% capital guarantee. This ensures that investors' initial capital substantially remains preserved while allowing the opportunity for significant upside.