New capital-reserve standards by Japan’s Financial Services Agency are prompting many large and regional banks there to cash in their hedge fund investments in advance of the March effective date. Financial Times reports that the FSA’s move, in compliance with the new international capital standards by Basel II, is making funds of hedge fund particularly unattractive as the banks’ once mighty $50 billion hedge fund bulge is expected to dwindle through redemptions. Which is a shame, since FoHFs have been returning 5% in returns compared with 2% generated by Japanese government bonds. “We have no plans to invest in hedge funds in the future because of the new rules,” an official of Mitsui Trust told FT. The new rules, which go in effect in March, demonstrate that their crafters “don’t understand investment strategy, they are following formulaic rules,” according to a chief investor office of one top bank, who went on to say that many institutions are selling even at a loss. “In the U.S., there would be lawsuits against the regulator.” For its part, the FSA says it has raised its standards because of its concern about transparency and the smaller banks’ ability to survive an unexpected swing in volatility. On the other hand, the agency, according to FT, may allow some investor to cut their HF risk weighting if they prove they are avoiding investment in certain very risk funds.
