Facing Demographic Reality, Japanese Pension Plans Turn to Hedge Funds

Japanese corporate pension funds are moving capital from domestic equities into hedge funds to ensure that the funds are ready to support the country’s rapidly aging population.

(June 22, 2011) – A recent survey found that Japanese corporate pension plans are shifting capital away from domestic equities and into hedge funds to boost returns in anticipation of the retirement of their rapidly aging beneficiaries, Reuters has reported.

A Russell Investments survey of 31 Japanese corporate pension plans has shown that the funds have decreased their investment in domestic equities to 14.6% as of March 2011 from 18.7% a year earlier while simultaneously increasing their allocation to hedge funds and other alternatives to 13.1% March 2011 from 11.6% a year before. Collectively, the pension funds surveyed manage 7.54 trillion yen, or about $94 billion.

“Considering that they have had a very hard time raising decent returns by directly investing in equities over the past years, pension funds are now very seriously considering taking more exposure in alternatives,” Tamotsu Adachi, the co-head of private equity firm Carlyle’s Japan unit, told the Reuters Rebuilding Japan Summit in Tokyo.

Institutional investors worldwide, principally sovereign wealth funds and American public pension plans, have embraced hedge funds in order to increase returns, aiCIO has reported. A Hedge Fund Research (HFR) report in April announced that the industry’s total assets had reached $2.02 trillion as of March 31, eclipsing the previous high of $1.93 trillion in the second quarter of 2008.

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The need for Japanese pension plans to turn from domestic equities to hedge funds is particularly acute. Japanese equities have faced anemic growth for the past two decades and the March 11 earthquake dealt a powerful blow to the island nation’s economy.

“In these conditions where Japanese pension funds are having trouble finding a return driver, they have to rely more on alternative assets, mainly hedge funds,” Mitsuhiro Arakawa, executive consultant at Russell Investments, told Reuters. “They don’t want to be in stocks after seeing them slump over the last 10 to 20 years. In fact, they may want to cut them at a quicker pace after the disaster in Japan.”



<p>To contact the <em>aiCIO</em> editor of this story: Benjamin Ruffel at <a href='mailto:bruffel@assetinternational.com'>bruffel@assetinternational.com</a></p>

Study: Investors Should Expect Growth of Clean Tech Private Equity

A study by Switzerland-based SAM shows that investors should target their investments to exploit growth in the clean tech private equity sector.

(June 22, 2011) — Clean tech private equity investment is expected to surge, according to a study by Switzerland-based asset manager SAM.

Its study — titled ‘Clean Tech Private Equity: Past, Present and Future’ — shows that the clean tech energy industry is poised to continue earning above-average growth. The drivers of that growing demand, the asset manager says, includes profits for higher cost competitiveness compared to conventional energy sources coupled with robust investor demand for clean energy solutions.

The report states: “Moves toward a more sustainable use of resources and energy have gained momentum, and several countries have assumed a pioneering role in this effort, often facilitated by incentive schemes. However, investors remain reluctant to invest in what they regard as a heavily subsidized industry.” Yet, the report also notes that clean tech sectors will gradually become less dependent on government subsidies, which could benefit private equity investors.

SAM’s study references a recent report by Mercer, which worked with 14 major institutional investors to conclude that over the next 20 years, the uncertainty surrounding climate policy and associated adjustment costs can contribute as much as 10% of the portfolio risk of a typical asset mix. According to Mercer, renewable energy-related private equity and infrastructure as well as venture capital and buyouts focused on low-carbon solutions and efficiency can help improve portfolio resilience.

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Without a doubt, institutional investors around the world have been more aggressive in keeping clean energy factors in mind when making investment decisions, Mercer Consulting’s Craig Metrick  told aiCIO earlier this year. But, while there has been a greater recognition globally to reduce emissions, the United States is still lagging behind Europe, largely due to the less supportive regulatory environment in the US. According to Metrick, Principal and US Head of Responsible Investment for Mercer, one of the reasons that US institutional investors have not been as aggressive in investing in renewable energy compared to their European counterparts is because of a lack of legislation. “In Europe, there are certain regimes for reducing carbon emissions, fostering a better legislative environment, whereas the debate on climate change and renewable energy has been very politicized in the US,” he said. Nevertheless, Metrick acknowledged that the consultancy’s clients are generally investing more heavily in renewable energy and clean tech through private equity funds.

Adding further heft to the SAM’s findings, an additional survey conducted by Mercer and released June 13 — which studied pension funds, foundations, and investment managements firms — revealed that the majority of respondents saw global climate change as both a potentially significant investment risk and as an opportunity. Overall, the survey found that 98% of pension funds and foundations and 87% of asset managers believe that global climate change poses risks but also offers opportunities. It also found that 57% of pension funds and foundations and 80% of asset managers make specific reference to climate change risk in their investment policy.



To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

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