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Finnowave Hedge Fund Aims to Quadruple Assets by Luring Japan's Pensions


Date: Thursday, July 22, 2010
Author: Tomoko Yamazaki and Komaki Ito, Bloomberg

Finnowave Investments, a Japanese hedge-fund firm, aims to quadruple assets to 100 billion yen ($1.2 billion) in about two years after it won a license to manage funds, making it easier to lure local pension money.

Finnowave obtained the discretionary investment manager license from Japan’s Financial Services Agency in June, said Hideki Wakabayashi, president of the Tokyo-based company. Assets under management currently stand at about 25 billion yen across three funds, he said.

The firm joins a growing number of Japanese hedge funds aiming to tap increased investment and advising demand from local pensions. More than a third of the Japanese pensions surveyed by JPMorgan Chase & Co.’s asset management said they expect to boost allocations to alternative investments such as hedge funds.

“Japanese pension funds’ attitude toward alternative investments is starting to change as they realize the need to diversify their long-only investments,” Wakabayashi said in an interview in Tokyo on July 20. “It’s part of our goal to have a good balanced investor base by winning more local mandates.”

Foreign investors, including family offices and funds-of- hedge-funds, account for half of Finnowave’s clients, while the other half are Japanese, Wakabayashi said. In 2008, about 70 percent of its clients were overseas investors, he said.

Additional Hiring

Finnowave added five people dedicated to administration and marketing to acquire the asset management license, Wakabayashi said. Firms must have at least 50 million yen of capital to be licensed.

“We do see more and more managers moving to get a discretionary investment management license and fully operate onshore in Japan,” said Rory Kennedy, chief operating officer, at Rogers Investment Advisors K.K. in Tokyo. “Ultimately, this will lead to a more robust Japanese hedge-fund business.”

Wakabayashi, 50, started his career in 1986 as an analyst tracking Japan’s technology industry at Nomura Research Institute Ltd. He also has worked as an analyst at JPMorgan Securities Japan Co. and Mizuho Securities Co. in Tokyo, according to the firm’s website.

Finnowave’s 20 billion yen flagship fund returned 15.8 percent last year, following a 13 percent return in 2008, and is up 2.5 percent so far this year through June, according to a letter to investors.

Outperforming

The long-short strategy fund mainly invests in Japanese stocks with a market value of at least 50 billion yen, according to Wakabayashi. It has outperformed the Eurekahedge Japan Hedge Fund Index in the past two years. The index fell 10 percent in 2008 and returned 7.3 percent last year.

The fund has capacity to take up to 60 billion yen, after which Finnowave plans to close it to new investors, he said.

“Pension funds are after simple-to-understand strategies like long-short funds that profit from buying good stocks and selling bad stocks,” Wakabayashi said. In a short sale, a manager sells borrowed stocks in the hope they can be bought back later at a cheaper price.

The fund profited by shorting Japanese financial stocks on the view that the sovereign debt crisis in Europe will weigh on the finances of local firms, according to Masao Fujisawa, chief executive officer of Finnowave, who runs the fund with Wakabayashi. On the long side, the fund bought machinery stocks such as Tsugami Corp., which makes grinding machines for hard discs used in consumer electronics, because of rising demand from China, Fujisawa said.

Small-Cap Rally

“The most important thing for us is to deliver steady returns for our clients,” Fujisawa said. “The asset increase has to come in-line with the performance.”

Finnowave set up another fund in April 2009, which invests in Japanese companies with a market value of less than 50 billion yen. That fund also employs a long-short strategy.

The fund was set up to capture the rally in Japanese small- cap stocks and will run for about three to four years with the goal of boosting assets by three to four times, said Fujisawa. The 2 billion yen fund has returned 73 percent through June since its inception.

Finnowave started a fund in October that only invests in Japanese and Asian technology stocks. The 2.5 billion yen fund returned 5.3 percent in the months it operated last year and is down 2 percent this year through June. The maximum capacity for the fund would be about 20 billion to 25 billion yen, according to Wakabayashi.

“Since the summer of 2008, we’ve stopped taking directional bets on the overall market and that has helped our performance, especially since the subprime crisis,” he said.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net