Facing Demographic Reality, Japanese Pension Plans Turn to Hedge Funds

(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.

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.”