Alternatives prove to be big in Japan
Looking back to the Bank of Japan’s adoption of negative interest rates in 2016, this move proved to be the spur for many investors in the country to seek more diversification and higher yields by investing in alternative assets, according to a study by London-based financial data company Preqin.
Two thirds of Japan-based investors now allocate to at least one alternative asset class, with almost six in 10 investing in private equity and a third investing in hedge funds.
Investors are primarily focused on local investments in private capital, with the largest proportions targeting the Far East; by contrast, hedge fund investors generally take a global approach.
Increasingly, however, Japan-based investors are also seeking to allocate to North America and the rest of Asia-Pacific in search of diversification.
In most asset classes, investors are also more favorable toward strategies higher up the risk/return curve, indicating that they are looking to alternatives to provide yield, not simply protect capital.
Moreover, investment activity in the next 12 months does not look set to be equal across asset classes. Ninety-six percent of private equity investors intend to make fresh investments in the coming year, compared with just 54 percent of hedge fund and private debt investors, and 41 percent of natural resources investors.
The majority – 71 percent – of investors have already established ESG policies in their mandates or are planning to include them within the next five years.
The report reveals that there are currently 303 Japan-based investors active in alternative assets, second only to China (450) within Asia-Pacific.
Compared with the rest of Asia-Pacific, Japan-based investors are more active in private equity, hedge funds and private debt, but less active in real estate and real assets.
Jie Sin Chia, head of Asia products at Preqin, says in a statement: ‘A persistent low-interest environment set by the central bank and stagnant growth in recent years have put enormous pressure on Japan-based investors as they look to meet their returns targets. Alternative assets have long been a part of the investment landscape in Japan, but the industry’s ability to offer diversification and long-term yield have brought them to the forefront of investors’ minds.
‘While they are clearly looking for opportunities to allocate to the rest of Asia, North America and Europe, in most asset classes investors remain primarily focused on domestic opportunities. We are likely to see this shift if the low-interest and slow-growth environment remains in place.’