2) Crypto products like Bitcoin or Ethereum are now on the minds of many investors. A lot of venture capital firms are looking into ways to maximize Blockchain investments. AML (Anti Money Laundering) rules have improved.
3) The US government is not easy to understand around crypto regulation. All 4 main agencies have 4 very different views. The US SEC say crypto is a security. The US treasury says crypto is a currency. The US Commodities Commission says it is a commodity. The US IRS says that crypto is property.
4) With such a wide difference in US government views, what should we believe? Maybe all of them. Most firms looking at crypto trading in the US try and anticipate all being correct as best they can.
5) Compliance may finally get easier via the Blockchain. If AML standards are incorporated, an investor can be vetted and part of a smart contract or anything similar. They can then be included automatically a second time and no longer have to go through an AML process twice.
6) In future transactions, Blockchains or Smart contracts may filter out clients or counterparties who do not qualify automatically. This can be a future significant cost saving within due diligence. A great use of "RegTech" or regulatory technology for clear savings.
7) Japan FSA have a FinTech helpdesk to encourage more companies to reach out and check if their concept or IP can be allowed within the market in Japan. The regulator want to encourage the crypto industry to grow, as it is considered legal tender in Japan. There is also a startup sandbox, so more firms can grow.
8) Earlier in 2019, new updated compliance AML rules were updated in Japan. They have helped to grow the local crypto industry. The local FSA want to collaborate and be open with all market participants. They want to avoid being a pure "rule enforcer" as crypto market evolution is growing fast, often ahead of rules.
9) Japan's population may be shrinking but the working population can still grow as women have be underemployed. There is a 77% participation rate by the labor force. By comparison, Switzerland has 82% participation rate. Japan could equal or better this with more women and more retirees working in future, perhaps 85% or more.
10) Japan, especially Tokyo is welcoming immigration. Many convenience stores often have foreign students behind the counter. In fact, 6.7% of the Tokyo city population is now foreign. Shinjuku and Itabashi have the highest foreign residence rates in the 23 wards.
11) Unlike the US or European markets, the baby boomer population is very well off. Some 48% of Japanese have NO personal debt at all. Housing has been paid off for many, and no schools loans ever existed. Spending may return from this cash in the form of luxury retirement spending for some.
12) Koizumi's impact, AKA Abenomics version 1.0 tackled many economic problems like corporate cross shareholdings. They peaked at 50% back in 1989, and now have almost ended with only 4% remaining. This has helped liquify Japan's equity holdings and increased many investor's returns.
13) Culturally, the final impacts are seen in the news. Toshiba, last year's big story was allowed to collapse. It got no help from the Mitsui group it belonged to. In contrast, just 8 years ago, Olympus was still saved by the Sumitomo group that it belonged to. Times have changed. The bonds that protected companies in the past against bad behavior, now have to pay the full price.
14) What do you do as a central bank when you cannot lower interest rates? You buy the market. In fact equity holdings are on track to be a full 10% owned by Japan's government by 2020 next year.
15) Many worry about this socialist style experiment of ETFs by the GPIF and others, but no final exit is known. One of Jesper Koll's most interesting ideas was to consider the elderly in Japan. They still have a large cash horde in bank accounts. If the inheritance tax could be minimized or if ETF holdings were made exempt from the dreaded inheritance tax, all of Japan's debt could be sold within 24 hours! Maybe a joke, or maybe not. Time will tell what the end game really will turn out to be with the BOJ.
16) KKR explained that ESG and in particular Corporate Governance, has been a key driver in their private equity carve outs. They have been able to buy quality companies, add value often with overseas mergers, and create higher valuations that at the time of sale. the previous mind set was that foreign private equity firms would only get a chance to buy weak or sick companies only. this has changed. They added value edge to proven dealmakers is now being recognized.
17) Private equity has not been easy in Japan when compared to other markets. Years before, the KKR founder Henry Kravis, once spoke to a large Japanese firm. When asked how many subsidiaries do you have? The CEO proudly said 2000! How many are core to the business? The CEO proudly replied 2000! It obviously took time for this kind of CEO to see value with KKR or any other private equity firm.
18) Tokyo University of Science has an endowment of US$1Billion in AUM. They typically keep 30% of assets ready as "dry power". They target just 2% return a year, and were happy to book 3 in 2018. The endowment has grown 10 fold since it began.
19) Regional banks have been losing business to large Mega banks after local corporates get to a certain larger size. These corporates are often looking for more cross border services and contact points overseas markets. Not a service set that local regional banks can compete with well. Investing to compete with this new style corporate is what private equity funds may try and figure out in future deals.
20) Banks in the US that use real estate agents for mortgage introduction, are seeing a new trend. Bitcoin & Ethereum are now listed as the source of funds. This has now become common in New York luxury real estate markets.
21) Tora trading stated that crypto market volume really dropped off in November 2018 but returned in March 2019. Prices have recovered well this year and volume is hoped to stay steady or increase for the rest of the year. Institutional activity is now beginning.
22) Over 80 top Family Offices are interested in making crypto investments. In fact 47% see a future need for crypto product exposure in future portfolios. The allocation may be small, typically less than 1% of total assets, but top US university endowments are now active in the space. Some 93 are now looking to maintain or increase future crypto exposure.
23) The biggest hurdle for more institutional activity within crypto markets is infrastructure. Many are looking for a prime brokerage clearing and custody service provider. All want to minimize any counterparty exchange risk due to recent hacks.
24) MMT (Modern Monetary Theory) is now spreading around why a nation, that does not see inflation in future, should not increase its debt. If the US see no inflation on the horizon, and has 125% of debt based on GDP, why not increase it? What could go wrong? This new theory may be short lived once markets change.
25) Compliance costs may start to lower as Blockchain begins to take over any tasks that are repeated. Redoing cleared paperwork for vetted clients may soon be automated requiring few staff and lower costs.
26) Hedge funds are most concerned with top line profits, but cost reduction is not valued enough. As a hedge fund grows, controlling costs by doing more functions inhouse can lower costs significantly over time.
27) The COO of Voltex stated that the profit impact he made from cost savings in his hedge fund, was higher than when he was a trader previously. Real Alpha can be captured when many other firms overlook these possible gains to P/L.
28) Size matters, so when hedge funds want to grow from small starts to large asset bases, what is key to that growth? Trust and transparency are the 2 core points explained on the panel by 3 multi-billion size hedge fund platforms. Public pensions want to avoid any embarrassment from headline risk mistakes.
29) When central banks stopped liquidity in mid 2017, many hedge funds suffered. The assumptions from risk assets and safe haven plays changed. The lack of liquidity made the safe haven investments lower in return. It was not enough to cover the losses from the risk assets. The is an art & science to risk management, and the impact from this lack of liquidity was not anticipated in asset pricing.
30) The Yale University endowment model of diversification was mentioned several times. Many rival endowments are trying, but it is difficult to repeat. Markets change and volumes wit them. What mix of assets is best for any portfolio is again the art not just science of any risk management.
31) Before the Lehman crisis larger pensions were often 90% funded. After the GFC they were down almost 65%. As of today, many are only 72% so time is needed to make up for the losses of 10 years ago. Time and money, the classic pair. Just getting back to a previous break even point may take another 10 years for many pension funds.
32) Hedge fund start ups are never easy to take on. The stresses and factors on what makes them successful are varied. One factor that is not often discussed is strong family support for anybody starting at a hedge fund startup. The lack of certainty can shake some family members. Having a very strong an supportive family that realizes that the road will not be smooth helps a lot. It may even be a key long term factor to the key players who can build a strong hedge fund business over time.
33) Hedge Fund start ups can have all of the promise in the world, but still fail. Too many founders think they are suddenly a genius not only of their portfolio, but of running a business as well. The two are quite different. Any talented PM can sometimes see choosing a meeting room carpet color, or which watercooler service provider as brain drain. Energy that is better used for alpha generation.
34) Talented PMs who know top line need to trust others for the business itself. Some joke that the term COO should be renamed to CEBI. The Chief of Everything But Investment. The name may be funny, but the need is not. It is quite serious and should be valued greatly.
35) Founder dictators types who micro manage all aspects of the firm often fail with lost energy to poor choices in systems and rehiring of personal that find out they are not in charge, but order takers from the founder.
36) Investors into hedge funds take a look at turnover of staff as part of due diligence. It can directly impact an investment decision. How the support staff approach their role is also misunderstood. A hedge fund should be built for a point 2-3 years down the line, not just 6 months later near a launch date. Anticipating needs mid term is important, not just getting started.
37) Nobody gets prizes within the hedge fund space for failure. Unlike in private equity or venture capital, nobody sees a failure as a great learning experience. What lessons did you learn from your first hedge fund failure? These questions are never asked positively. It is more of a one shot or not scenario generally speaking.
38) Hedge fund startups also have the further burden of being positive and profitable early. Many tech startups need years to become profitable. Hedge fund startups, for good or bad, need to have a positive P/L as soon as possible. Hopefully from day one.
39) Regulatory arbitrage has gone away in Asia. The compliance difference between Hong Kong, Singapore and Tokyo has shrunk significantly. Best practice in Hong Kong is often quickly adopted by Singapore. Tokyo often figures out local market adaptations for Japan early. Irish regulators have commented on how Japan's FSA are some of the quickest and most diligent regulators they see in markets today.
40) Talent is a bottle next for many firms. Finding the right talent and helping them to grow is again a mix of art & science. Generally one must try and minimize repeated tasks with technology in order to maximize added value talent. Treating staff as pure labor to do manual tasks will risk having them leave.
41) Retention of talent does have a regional difference between markets in Hong Kong & Singapore compared to Tokyo. Nobody typically will leave a job in Japan "for $5 dollars more". This is not always the case in Hong Kong or Singapore. Competitive pay and retention as very close cousins in Asia.
42) Japan has a higher sense of pride in their work that is less monetary and more expertise driven. This allows more hedge fund firms to invest in Japan based talent more easily. They can also expect a real return on staff investments compared to Asia.
43) Hedge funds that trade Japan from overseas do not perform as well as firms onshore in Tokyo. Investors need to ask why they do not have a Japan based office? Why they can still be a top performing hedge fund while being offshore? The old excuse of local taxes when onshore is no longer justified. Better stronger reasons are needed to justify lower offshore based hedge fund performance.
44) Tokyo Governor Koike mentioned that the size of Tokyo justifies its need to be a financial center. With over US$1 Trillion in GDP, it is equal to the national GDP of Mexico. Tokyo has real financial impact. It has the size in economic activity and also population to attract hedge funds to the city in future.
45) She hopes to bring 50 overseas hedge funds to Tokyo by 2020. The city of Tokyo has been issuing green bonds, each getting fully sold. They are in line with global ESG trends, and help to maintain a high standard of living within the large growing metropolis. 46) These green bonds fund CO2 reductions to the environment making Tokyo a more attractive hedge fund financial center longer term. Taking actions to make Tokyo a more attractive financial centers is being maximized.
47) US ambassador to Japan, William F. Hagerty IV, gave insights on how he lived in Japan, during the bubble era. He was with Boston Consulting Group and was deeply involved with private equity. Coming from the private sector, he knows the needs of hedge funds in Japan. However, he is often asked what has changed since your first experiences in Japan, compared to now? His answer was eye opening, China.
48) When he first worked in Japan 1988-1991 the GDP per capita in China was only US$250 per person, today it is over US$11,311! That is a 45 times higher impact between the two eras. Trade war impacts between the US & China in headlines today, will have collateral damage economically with Japan.
49) High value components often made in Japan, but shipped to China for sale to the US will slow down in trade volume. It is early days for full impact, but it is starting. The US has been the largest single investor into Japan for many decades, and Japan has been a top tier investor into the US as well.
50) Both economies are very active, but China trade actions will impact the economy in Japan. Hedge funds with strong analysts who can think "out of the box" around cross border trade issues, will find profits. Many will find out the sectors or corporate names that will avoid or suffer the most from these changes. That trade war crisis is an opportunity for hedge funds profits in Japan!
Please visit us for our Friday Feature Review where TMJ Partners will review books, movies, conferences and anything else with a financial theme. Follow us now for our free weekly updates, just click here. Thank you for reading and learning more about how money is made in finance!
For more Buy-Side and Sell-Side roles in Asia-Pacific, contact our TMJ Partners Japan & Asia Finance team.
Tokyo Tokyo
No comments:
Post a Comment