Tokyo: Myron Scholes, who won the 1997 Nobel Prize in economics, is seeking a licence to advise Japanese pension funds after opening an office in the country. “We have an application in to Japanese regulators for a discretionary fund management licence to enable us to allocate pension fund money in our fund or other alternative investments,” Scholes said in an interview in Tokyo on Wednesday.
Banks and pension funds in Japan, the world’s second largest economy, are increasing their investments in hedge funds and buyout funds to improve returns in a country where bond yields are less than half of those in the US.
Japan’s national pension fund, which manages about 111 trillion yen (Rs37 trillion), said last week it will consider investing in alternative assets, such as real estate investment trusts, hedge funds andcommodities.
Scholes’ Platinum Grove Asset Management, L.P, based in Rye Brook, New York, manages about $4.5 billion, he said. About 10% of its funds come from Japanese investors. Its Japanese arm, which has nine employees, was started in Tokyo in November and was registered as a securities investment adviser in March, according to the company.
The firm’s Platinum Grove contingent capital fund has an average annual return of 9.4% after fees, Scholes said.
Scholes and Robert Merton won the Nobel Prize for economics in 1997 for their work in valuing options. Together with the late Fischer Black, they developed the Black-Scholes model of pricing options, or contracts that give the buyer the right, but not the obligation, to purchase a security or commodity at a later date for a specified price.
Before he set up Platinum, Scholes was a partner at Long- Term Capital Management L.P., which collapsed in September 1998 as bets it made in world bond markets went awry.
Japanese baby boomers, those born in the late 1940s, will receive 85 trillion yen of retirement funds in the five years starting this year, according to a forecast by Nomura Holdings Inc. That compares with 800 billion yen of retirement funds paid out in fiscal 2006, it said. Nomura estimates about 60% of those assets, or 51 trillion yen, will be invested in financial instruments, 30% will be used to repay debts and 10% will go to short-term expenditures.
“There already are a number of investors in Japan putting money in hedge funds,” said Akira Takei, who helps manage $10.6 billion in assets at Fuji Investment Management Co. in Tokyo. “Many of them are not quite comfortable about the performance.”
Hedge funds returned an average 13% globally in 2006, lower than the 15.8% including dividends returned by the Standard and Poor’s 500 Index, according to Hedge Fund Research Inc. in Chicago. It was the biggest gain since 2003, when the private-investment pools gained 19.6%.
Derivatives will likely be used by more companies including coffee-shop chain Starbucks Corp. to reduce business risks such as changes in the price of commodities or exchange-rate fluctuations, Scholes said.
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
Lowering such risks also means companies will need to sell less equity as a buffer against any losses, Scholes said.
“You can economize on the amount of equity you need to run your business,” Scholes said. Equity is an “all-purpose risk cushion” and “expensive,” while derivatives let companies shift specific risks to capital markets more cheaply, he said.
Kazu Hirano in Tokyo contributed to this story.