Japanese investment in hedge funds up 50%

And allocation to private equity is small but growing, says a Goldman Sachs/Russell report.

The number of Japanese institutional investors allocating to hedge funds rose by 50% in 2002, according to a global hedge fund survey conducted by Goldman Sachs International and Russell Investment Group.

This exceeded the global trend: the number of institutions globally investing in hedge funds rose by 40%.

Among respondents, total hedge fund commitments reached ¥237 billion ($2 billion), a threefold increase over the ¥77 billion ($665 million) reported last year. That is because the size of allocations, as well as the number of participating investors, has risen. As predicted in last year's survey, the average allocation increased from 4.5% of portfolios in 2001 to 7.1% in 2002; respondents predicted that hedge fund allocations will rise to 8.5% by 2005.

The preferred strategy remains equity market-neutral (employed by 65% of respondents) and equity long/short (35%). Investors who said they are considering investing into hedge funds in 2003 also indicated these two strategies are preferred. Globally, equity long/short and convertible arbitrage remain the favourites.

The most popular structure to invest is via single-strategy funds, used by 85% of respondents, although many continue to use funds of funds; the biggest jump since 2001 was the number of investors using both methods (up from 22% to 55%).

Private equity remains a distant second choice for alternative investments in Japan, with only 12% of institutions saying they invest in it. But, the report notes, this is double the number using private equity in 2001. Several institutions expressed their intention to invest in private equity for the first time in 2003. Total commitments among institutions surveyed in private equity is $360 million, but given the delays between allocating capital and actually committing it, this figure may really be higher.

The nascent industry contrasts the global trend, which found commitments to private equity in North America and Europe declining.

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