Herald Tribune – Bank rules may limit hedge funds in Japan
The adoption by Japan of tighter capital requirements next year may force the biggest banks to trim investment in hedge funds, and smaller institutions to abandon that class of assets entirely.
Banks in the world’s second-biggest economy after the United States must comply starting at the end of March with Basel II, new risk standards requiring them to set aside more reserves against loans and investments as the potential for losses increases.
Japanese investors, led by pension funds, insurers and banks, held about ¥4 trillion, or $35 billion, in hedge funds at the end of 2003, up from ¥1 trillion in 2000, according to a report in June by the Bank of Japan. The new risk assessment rules may crimp such investment by the 111 regional banks that hold 36 percent of the $6.7 trillion in assets in the country.
“Lower-tier regional banks may have to dispose of hedge fund assets because they’re incapable of managing the risk,” said Shin Kumashiro, senior manager in the alternative investing unit of Sumitomo Trust & Banking, which has $1.4 billion invested in hedge funds.
Under the new rules, depending on the type of fund, its liquidity and transparency in disclosure, banks may have to set aside as much as 100 percent of their investment as reserves. Regulators have yet to announce guidelines.
