AIJ Investment Advisors Co., suspended by Japan’s financial regulator, told investors one of its funds returned 241 percent since it started in May 2002 by mainly trading Nikkei 225 options, according to a newsletter obtained by Bloomberg News.
The Financial Services Agency on Feb. 24 ordered the Tokyo- based firm with 183.2 billion yen ($2.3 billion) of client money to stop business for a month as the FSA investigates it for possible losses, leading to a nationwide probe of 263 asset managers, the biggest ever of the nation’s funds industry. The return of AIJ’s AIM Millennium fund since inception compares with a 22 percent drop by the benchmark Topix Index (TPX), according to the four-page October 2011 newsletter in Japanese.
Alternative investment managers that eschew traditional investments such as stocks, bonds and cash have come under scrutiny in the past four years, since the collapse of hedge funds run by Bear Stearns Cos. in 2007. Bernard Madoff was arrested in 2008 for operating the largest Ponzi scheme in U.S. history and hedge fund Galleon Group LLC co-founder Raj Rajaratnam was found guilty in May on insider-trading charges.
“The similarity in the Madoff situation and the AIJ situation is not necessarily the investment strategy, but the excessive degree of trust both fund managers inspired in people similar to themselves,” said Frank Packard, the president of Triple A Partners Japan Co., a Tokyo-based investment manager and adviser regarding hedge funds. “The strategies at both firms seem to promise high returns, in fact both appear to have been bogus.”
The Millennium fund invested in Nikkei 225 options and futures as well as private equity, using an index that AIJ created to gauge whether markets were overbought or underbought, according to presentation materials provided to a pension fund that were obtained by Bloomberg News. The undated presentation document didn’t name the pension fund.
AIM Investment Advisors Ltd. in the British Virgin Islands was listed as the manager of the fund, which was a private placement open-ended unit trust, and the fund was registered in the Cayman Islands, the 13-page document in Japanese said. Bank of Bermuda, a unit of HSBC Holdings Plc, was listed as the fund administrator. Margrit Chang, a Hong Kong-based spokeswoman for HSBC, declined to comment.
The investigation of the 263 asset managers is the biggest into the Japanese fund industry, according to a regulatory official, who asked not to be identified because the matter is sensitive. In a typical year, officials conduct routine inspections of about 15 asset managers, the official said. The funds themselves provide an annual report.
Regulators have been investigating AIJ since the end of January, and discovered that the company has been unable to explain to investors the current state of the way their money is being managed, according to the FSA.
“This is a so-called alternative investment fund and unlike traditional assets such as equities and bonds, the aim is to secure absolute returns regardless of the market directions,” the newsletter said. It noted the strategy is able to provide stable returns even when bond and stock markets drop and that the fund was no longer taking in new investments.
AIM Millennium’s return since it was started in 2002 compared with a 16 percent gain by the Nomura BPI benchmark for domestic bonds during the same period, according to the newsletter.
Japan’s hedge fund industry has more than halved to manage $16.1 billion, down from a peak of $39 billion in 2006, and compares with $109 billion managed by funds in Asia outside of Japan, according to Eurekahedge Pte, a Singapore-based data provider. Japan-focused hedge funds lost 4.1 percent in 2011 as global peers suffered their second-worst year on record amid Europe’s sovereign debt crisis and concerns of an economic slowdown worldwide.
AIJ, led by Kazuhiko Asakawa, was established in April 1989, and had 120 clients including pension plans with 183.2 billion yen in assets as of the end of 2010, according to a statement from the FSA. It has 12 employees. Phone calls to AIJ’s main office were answered by an automatic recording which didn’t allow messages to be recorded.
The newsletter cited ITM Securities Co. as the distributor of the fund. Yasuo Tsuneyoshi at ITM’s planning department said the firm sold AIJ’s funds to pensions, declining to further comment until the investigation is completed. ITM was established in June 1998 and started business in September 1998, according to its website.
Lights at ITM’s office on the seventh floor of the Nihombashi-Dori Ni-Chome Building in Tokyo’s Nihombashi district were switched off today, and the only indication of recent activity was a container of hand sanitizing liquid on a table outside the locked door.
AIJ also listed two other funds in the newsletter, with returns of 32 percent and 22 percent since their inceptions. The funds were based in Cayman Islands, according to the newsletter, which provided monthly and annual returns on its funds.
Among corporate pension plans that put money with AIJ are Advantest Corp., a maker of memory-chip testers, Yaskawa Electric Corp. and a truck driver pension plan.
“Everybody needs to do their homework and correct due diligence” regardless of who they’re investing with, said Triple A Partners’s Packard. “This should be a wake-up call to the fiduciary responsibilities, both for regulators and investment managers.”
Madoff, serving a 150-year sentence in a U.S. federal prison, cost investors $50 billion before he was arrested in December 2008 and charged with operating a long-running Ponzi scheme in the New York-based firm’s business advising rich people, hedge funds and institutions.
Madoff had kept his firm’s financial statements under lock and key and was “cryptic” about its advisory activities when discussing them with employees, the U.S. Securities Exchange Commission said in a lawsuit against him at the time.
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