Japanese Pension Plans May Triple Allocation to Alternatives, Credit Suisse Says

(July 15, 2011) – Japanese corporate pension funds worth a collective $760 billion are showing increasing interest in alternative assets like hedge funds, private equity, and real estate, and will likely triple their allocation in the asset class, Credit Suisse has said.

Japanese corporate pension plans are in vise as demographic reality collides with a weak economy battered by the March 11 earthquake and tsunami, and they are increasingly looking to alternatives like hedge funds to shore up returns. Typical pension plans allocate 2 to 5% to alternatives and many plans are moving to up that allocation to about 10 to 15% in the next two years, according to an analysis offered by Credit Suisse.

“What’s interesting to us right now is how important the institutional investors in Japan are for hedge funds,” Benjamin Happ, Hong Kong-based Asia-Pacific head of capital services in Credit Suisse’s prime services division, said to Bloomberg. “The investor-base in Japan today is the largest and most important group of hedge funds investors in all of Asia and we prioritize it accordingly.”

Japanese corporate pension plans are looking to invest in single hedge fund managers over fund-of-funds, Happ said. Analysts have questioned the efficacy of the fund-of-funds approach over directly investing in single managers, pointing to the additional fees that fund-of-funds reap on top of the hedge fund managers’ fees. Japanese corporate plans seeking out single managers indicates that their level of sophistication has increased, Happ said.

“There were concerns that the earthquake and subsequent events surrounding it will dampen the interest-level of Japanese investors in hedge funds, but that has not at all been the case,” Happ explained. “If anything, the events in March have exacerbated or highlighted the need to have portfolios that are more diversified in their construction.”

Japanese corporate funds were not alone in feeling the pressure from the island nation’s weak economy. Japan’s Government Pension Investment Fund, the world’s largest asset owner with about $1.4 trillion in assets, took an investment loss of about 5% in the 2010 fiscal year, aiCIO has reported.

As institutional investors around the world lick their wounds from the 2008 market collapse, the hedge fund industry has flourished, with asset owners turning to hedge funds to recoup their losses from the crash. Industry assets reached $2.02 trillion as of March 31, 2011, according to Chicago-based Hedge Fund Research (HFR), aiCIO has reported. The new peak eclipsed the previous second quarter of 2008 record of $1.92 trillion.