Japanese interest in US-based hedge funds is projected to increase in the years ahead as Japanese institutional investors and pension managers, in particular, seek to achieve more robust portfolio returns. Japan's aging population, pressured by a low domestic interest rate environment and the need to meet obligations, will be among the main drivers of the pensions' investment activity. However, most US hedge fund managers have done little to prepare their marketing and investor relations infrastructure to attract and service this unique investor segment. To establish relationships with Japanese institutional investors, American fund managers need to bridge the cultural divide and work to understand Japanese investors' perspectives.
The barriers to penetrating the community of Japanese institutional investors are meaningful. However, as with general market principles, the harder something is to obtain, the more desirable it is. Japanese investors are thorough, long-term, relationship-oriented allocators. This makes them valuable partners for any hedge fund willing to invest the time and effort to understand and build a rapport with them.
While overcoming the geographical differences with Japanese investors only requires an airplane ticket, bridging the cultural differences to achieve a mutually trusting relationship requires a great deal more understanding and patience. The best way to lose an opportunity with a Japanese investor is to assume you know their expectations and process. There is good reason the investment community refers to "Asia ex-Japan" as the Japanese economy and Japanese investors are unique. When approaching Japanese investors to cultivate new relationships, hedge fund managers and marketers must understand and respect such differences.
In the fourth quarter of 2009, we surveyed 10 Japanese institutional managers specialising in alternative investment research on their perceptions of foreign investment managers. We aggregated their most common perceptions and here attempt to explain them.
What we found most interesting was learning that Japanese investors believe they can learn more about a manager by discussing periods of adversity and how such difficulties were effectively handled and overcome rather than focusing on a fund's successes. Since language and time zone barriers limit Japanese investors' ability to monitor managers on a real-time basis, they want to fully understand prospective managers' behaviour patterns in difficult circumstances to gain confidence in their risk management skills. This understanding allows Japanese investors to rely upon the manager to handle unexpected situations without worrying about needing to monitor a manager in real time from halfway around the world.
When marketing to Japanese investors, it is important to regard them as long-term investors from the outset and understand it is very unlikely that any institutional investor will quickly decide to allocate to a fund. Marketers can gain trust and respect by understanding the Japanese asset allocation calendar – usually the Japanese fiscal year begins in April as do their allocations to new investments. Some talented managers disappoint Japanese investors when just five minutes into a first meeting, the manager loses enthusiasm because they hear the budget timing does not match for an immediate investment or the fund AuM is not yet enough for the investor.
Japanese institutional investors' objective is not to make an investment decision the first time they meet a manager. Japanese investors prefer to meet with managers over time to get to know the team and intimately understand their strategy, which will allow for the building of mutual trust. By understanding the Japanese budget calendar, managers can display a commitment to the Japanese investor community and an understanding that managers should not expect to achieve immediate results.
It is a widely held belief in Japan that the most talented foreign managers visit Japan when there is little capacity left in a fund or consider the country at the end of a manager's fundraising efforts, usually a few months before the final closing. A manager should be prepared to establish and discuss a medium-term marketing plan for Japan as well as to clarify the importance of the Japanese market for a fund from a strategic point of view. This signals to Japanese investors that you have a commitment to the market and, by extension, that you are committed to long-term partnerships with Japanese investors.
Most of the institutions we surveyed felt that the best managers never even make it to Japan because they can easily attract investors without having to travel to Japan. Paradoxically, those are the managers which Japanese investors most want to meet. This leads to a belief commonly held among Japanese investors that the foreign managers who visit Japan do so when they have not been able to raise enough assets in their own market. Consequently, potential growth opportunities may exist in Japan for managers that fall into this category and who are ready to commit to a long-term relationship with Japanese investors.
Japanese investors will go through great efforts to communicate effectively with foreign managers. They are not afraid of asking questions and studying the global alternative fund management industry to better understand the managers. They prefer to communicate largely via e-mail for thorough communication (and for compliance purposes). Japanese investors strive to bridge the cultural gap by actively studying English and providing cross-cultural feedback so that foreigners better understand the needs of the Japanese businessperson. Because they work hard to maintain their ability to understand foreign managers, Japanese investors are particularly sensitive to managers who fail to reciprocate the effort. Conversely, Japanese investors are very appreciative of managers who listen to their comments, consider their concerns and adjust the discussion to specifically address the issues that are of most interest to the Japanese investors.
Somer Hatano joined FletcherBennett in January 2010 to provide dedicated Japanese alternative investor coverage. Prior to joining FletcherBennett, Hatano managed her own firm, Alpha Dialogue Advisors, a business development and consulting firm advising hedge funds and private equity funds in raising assets from Japanese investors. Previously, Hatano worked in the capital introduction group at Morgan Stanley Japan in Tokyo. In this role, she acted as a liaison for some of the world’s leading hedge funds in introducing them to Japanese institutional investors. Before joining Morgan Stanley, she represented Asset International, Incorporated, the publisher of Global Custodian and PLANSPONSOR magazines, in Asia and was responsible for advertisement and subscription sales for its magazine brands as well as organising the largest annual pension fund seminar in Japan known as the Japan PENSIONS.
This article first appeared in www.finalternatives.com on 7 May 2010.
