Introduction
Hajimemashite, Jim Tomeo
desu, dozo yuroshiku onegaishimas. Hi, I'm Jim Tomeo, COO and Senior Portfolio
Manager of SSARIS Advisors. In the next few minutes, I will introduce a hedge
fund-of-fund investment opportunity: a strategy of specialist hedge fund managers
focused on trading Japanese securities markets.
SSARIS Background
Before I describe this investment
in some detail, let me say a few words about SSARIS and why it is well-positioned
to manage this strategy. SSARIS is a majority-owned subsidiary of State Street
Global Alliance, LLC which is jointly owned by State Street Global Advisors
and ABP, one of the largest pension funds in the world. SSARIS operates as
a hedge fund and fund-of-fund investment boutique with a global reach. SSARIS
has been managing hedge fund assets for over 21 years and combines an experienced
management team with seasoned professionals who have particular expertise
in selecting and monitoring hedge fund investments. Our investment philosophy,
which is detailed in a recently published article in the Journal of Alternative
Investments, combines convergent and divergent hedge fund styles to achieve
greater diversification, which we believe is a key to long-term success in
the hedge fund business.1
Why is Strategy Well-Positioned?
Why do we think this strategy
is well-positioned in today's rapidly growing hedge fund marketplace? Japan
has one of the most liquid and well-developed capital markets in the world.
Over the past several years, its sophistication has grown to include a well-developed
securities lending and prime brokerage capability, essential for supporting
the activities of long/short hedge fund managers. And there's strong motivation
to succeed. Like most of the developed world, Japan has been faced with an
aging population, looming pension liabilities and a slow growth economy marked
by low interest rates. This has prompted banks, insurance companies, asset
managers and government agencies to explore new ways of diversifying traditional
portfolios in an effort to enhance returns. Japan has turned its attention
to hedge funds.
Investment Management in Japan
In the past 5 years, the number of managers focused solely on Japan has increased
from less than 30 to more than 100, according to publicly available data.2
Assets managed by these hedge fund managers, the majority of whom are located
outside of Japan, has grown from an estimated $3 billion in 2001 to over $20
billion in 2003, making Japan the fastest growing hedge fund marketplace in
the world.3 Most of the growth has come directly from investments
made by Japanese institutions. A recent poll conducted by Goldman Sachs and
Russell Investments indicates that pensions are expected to significantly increase
allocations to hedge funds in the future. We believe that this is all very good
news for hedge fund opportunities in Japan.4
Japanese Hedge Funds
What is the reason one might
expect Japanese hedge funds to produce above average returns? First of all,
from a professional trader perspective, Japanese securities markets are not
“over-broked”. Many international firms pulled out of Japan in the 1990s
and early part of this decade leaving behind a highly liquid, well-capitalized
equity marketplace with inefficiencies for hedge fund managers to target.
Performance data from William Mercer suggests that active managers in Japan
experience a wide dispersion of returns around their benchmark.5
This sets up ideal conditions for managers who typically seek to buy undervalued
and sell overvalued securities within a hedge fund structure.
Multi-Manager Japan Equity Strategy
Now let's take a closer look at the Multi-Manager Japan Equity Strategy.
Strategy Summary Information
The Multi-Manager Japan
Equity Strategy recognizes that although there is considerable value in the
market neutral equity area, a fund-of-funds that diversifies beyond this style
will likely be needed to satisfy Japanese investor demand. Therefore, the
strategic allocation will include: market neutral with a beta of zero, fundamental
value with an average beta of 0.10, and opportunistic with an estimated average
beta of 0.30. We have carefully selected managers who have strong business
models, infrastructure that is capable of growing with the market, and whose
performance drivers or sources of return are complementary to other managers
in the strategy.
Performance
Generally speaking, we believe
we have created an approach which seeks to perform like a market neutral strategy
during relatively calm market environments, that will have a dynamic beta
able to take advantage of advancing markets, and a defensive characteristic
in falling equity environments. The strategy's volatility is expected to
remain consistently low.
Strategy Managers
Approximately, three-quarters
of the managers for the strategy are located outside of Japan. However, many
have a local research capability in Japan. The combined strategy diversifies
exposure across small, mid and large cap stocks with an average market capitalization
of approximately 1 billion. Similarly, all industry and sectors are represented
in the strategy. Equity positions are fully transparent to SSARIS and are
monitored to ensure that concentration risk will be effectively managed.
Summary
In summary, we believe the
Multi-Manager Japan Equity Strategy takes advantage of inefficiencies in the
Japanese equity market. It targets the risk of a typical equity market neutral
strategy and the returns of a dynamically managed long/short portfolio. Its
average beta target is low and its returns seek to outperform in falling equity
environments. It is a strategy of diversified hedge fund styles that combines
convergent and divergent investment approaches in attempt to achieve a high
level of diversification.
The future growth in the
hedge fund industry is expected to come mainly from institutions and pension
funds targeting opportunities outside North America. We believe that SSARIS,
with its fully integrated hedge fund capability and its strong affiliation
with State Street Global Advisors in both the US and Japan, is well-positioned
to service your absolute return investment needs.
Domo arigato gozaimashita.
1 The Journal of Alternative Investments,
Summer 2004.
2 White and Case Update Regarding Operating
Issues in Japan-Based and Directed Investment Funds, October 2004.
3 White and Case Update Regarding Operating
Issues in Japan-Based and Directed Investment Funds, October 2004.
4 Report on Alternative Investing by
Tax Exempt Organizations, 2003.
5 William M. Mercer, January 2001.
This material is for your private information.
The views expressed in this commentary are the views of Jim Tomeo of SSARIS
Advisors, LLC through the period ended January 7, 2005 and are subject to
change based on market and other conditions. The opinions expressed may differ
from those of other SSgA investment groups that use different investment philosophies.
The information we provide does not constitute investment advice and it should
not be relied on as such. It should not be considered a solicitation to buy
or an offer to sell a security. It does not take into account any investor's
particular investment objectives, strategies, tax status or investment horizon.
We encourage you to consult your tax or financial advisor. All material has
been obtained from sources believed to be reliable, but its accuracy is not
guaranteed. There is no representation nor warranty as to the current accuracy
of, nor liability for, decisions based on such information. Past performance
is no guarantee of future results.
Posted On: January 12, 2005
|
