Japanese Madoff Jailed in $240M Fraud Case

(December 18, 2013) — A Japanese fund manager has been sentenced to 15 years in prison after defrauding pension funds out of ¥24.8 billion (US$240 million) between 2009 and 2012.

The case, which echoed US-based manager Bernie Madoff’s audacious fraud by creating his pyramid scheme in 2008, was brought after Kazuhiko Asakawa lied about his firm’s investment performance and the size of assets under its management in order to solicit more investments from pension funds.

The court also handed down seven-year jail terms to his associates Shigeko Takahashi and Hideaki Nishimura, according to Agence France Presse.

Investigators found the Japanese firm, AIJ, had lost ¥109 billion ($1.1 billion) over nine years to March 2011 through derivative trading, using cash invested by pension funds.

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As well as the jail terms the court also confiscated ¥570 million of AIJ’s assets and separately ordered them to pay a total of ¥15.7 billion.

“It was an audacious and shameless crime,” presiding judge Akira Ando told the court.

“The act was extremely heinous as they insinuated themselves (into the favour of) pension funds that required stable management.”

Madoff is currently serving a 150-year jail term in the US for his massive Ponzi scheme, after taking in billions of dollars from thousands of clients over decades, and paying out fake “profits” to some investors by plundering new cash from others.

His pyramid fraud collapsed in 2008, wiping out numerous family fortunes. He was arrested in December that year, and pleaded guilty in 2009.

(December 18, 2013) — Investors in low volatility strategies are unlikely to suffer from a bubble effect due to the low volume of cash invested, according to research from Ossiam.

The provider of smart beta exchange-traded funds and affiliate of Natixis Global Asset Management investigated whether the recent popularity of low volatility strategies could result in a bubble effect, caused by the flow pressure on the prices of companies typically selected by this approach.

Ossiam assessed four measures of “expensiveness” which would be considered a hallmark of an approaching bubble—fund flows, fundamental valuation, relative performance, and whether correlations with other strategies increase.

For each of the criteria, Ossiam’s data suggested that there was no evidence of an abnormal—or bubble-like—behaviour.

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“Despite the amount of recent interest in this investment style, the amount invested in this sector is small compared to the market capitalisation of the low risk stocks,” Ossiam said.

“These strategies do not exhibit bubble-like outperformance with respect to the market… the low-risk stock appear somewhat expensive, but the historical analysis reveals that this expensiveness was not generated only recently, but is rather a manifestation of a premium from which less indebted and more profitable companies benefit.”

The research did highlight an increase in correlation however. An earlier experiment by Deutsche Bank’s quantitative team in May 2013 had looked at the crowdedness of low volatility strategies, and found that when investors traded a group of stocks as a basket, i.e. a basket of low volatility equities, they showed higher correlations than a market average, particularly during downturns.

Ossiam’s investigation took the S&P500 universe and built 10 portfolios corresponding to volatility deciles, and measured the average correlations within each during market downturns.

The data found the lowest volatility buckets consistently showed the highest correlations among the volatility buckets. However, Ossiam wasn’t able to conclude that the correlation was driven by money flows into the bucket as it could also be due to the low volatility buckets’ concentration in defensive stocks, such as defence, healthcare, and utilities.