Hedge Funds Aren't `Piranhas' in Japan's Pond, Regulator Says

Date: Thursday, September 6, 2007
Author: Mariko Yasu and Komaki Ito, Bloomberg

Japan doesn't want to deter hedge and buyout funds when it introduces new legislation this month that puts them on the regulator's radar screen, its chief said.

``Japan needs an ecosystem with plenty of bait, not a pond full of distilled water'' to attract global money, said Yoshimi Watanabe, who was named head of Japan's Financial Services Agency last week. Hedge funds ``aren't piranhas in the pond'', Watanabe said at a Tokyo conference yesterday.

Watanabe's comments come as Japan prepares to implement rules that require hedge and buyout funds sold in Japan to make filings on their composition and managers to regulators. Banks and other financial firms in Japan boosted investments in hedge funds by 22 percent to 7.4 trillion yen in the year ended March 2006, according to the Financial Services Agency.

Japan passed the Financial Instruments and Exchange Law last year to reform its rules on stocks, bonds and other securities to cover a wider range of investment products including credit derivatives, weather derivatives and privately sold funds.

Under new rules starting Sept. 30, managers of funds that were sold to Japanese investors without using banks will have to be registered at regulators by the end of the year. Funds sold to institutional investors will need to file profiles including the name of the fund, representatives and locations to the government.

Japan's markets watchdog, the Securities and Exchange Surveillance Commission, will also be able to conduct on-site inspections if needed.

Exemptions

Under new rules disclosed in July, exemptions were made to exclude some foreign funds. If a foreign fund has fewer than 10 Japanese investors or if investment from Japanese is no more than a third of total capital, it will be exempted from registration and government filings.

The exemptions diluted the law's expected impact on a growing hedge fund and buyout presence in Japan, said Norifusa Hashimoto, a Tokyo-based attorney at Paul Hastings. ``In most cases of foreign funds sold privately in Japan, there're only two or three qualified, institutional investors.''

Clients of hedge funds typically pay fees equaling 2 percent of assets and 20 percent of investment profits. The loosely regulated investment pools can bet on falling as well as rising asset prices, and managers gain substantially from profits on money invested.

To contact the reporter on this story: Mariko Yasu in Tokyo at at myasu@bloomberg.net .