TOKYO (HedgeWorld.com)–A local presence can be that special something that gives a manager an edge and helps investors distinguish winners from losers rather than “guessing the strategies that will outperform in yet-to-be-determined market conditions.” That was among the points made by Shaun Lawson, the Japanese representative for Hunter Capital, at a conference June 12.

Mr. Lawson, a 14-year veteran of Japanese financial services with the last seven in hedge funds, pointed to six key trends in Japan’s hedge fund industry that investors should look for: size and speed of growth; emerging local managers and differences with their foreign manager counterparts; shifts to local asset management; new domestic funds of funds; continued lack of local third-party marketing; and potential for increased regulation.

At the end of 2005, about $54.8 billion was invested in Japan-focused funds, 4.6% of the total global hedge fund investment. That’s a small amount compared to what it could be, given that Japan has a weighting of 10% on the MSCI World Index. Since mid-2003, allocations by hedge funds to Japan have grown on average by 34% every six months, with recent growth slowing but remaining strong.

There are more local bilingual managers emerging who have access to Japanese management, native ability to review company data and deep experience in the markets. These managers are successful at securing seed money needed to launch funds.

According to prime brokers with whom Mr. Lawson has spoken, this year “Japanese managers launching from positions at domestic brokers and asset management companies are getting seeding from their clients, with a higher probability if they move onto an existing platform.” Generally, research has shown that funds with analysts on the ground in Japan did significantly better on average than funds based in the United States or Europe.

This ties into the emerging domestic-based fund of funds products coming downstream by companies such as SPARX and GCI. Until recently, funds of funds have not had a good Japan focus, with many analysts making the occasional trip to Japan to visit funds and meet investors.

There continues to be a lack of third-party marketing available to hedge funds for sales of domestic or foreign-based funds to Japanese accredited investors. Despite the introduction of a securities sales intermediary registration that allows for fund sales under the regulatory umbrella of a sponsoring securities company, there are few organizations with this designation, an important outstanding issue on the eve of upcoming changes to the regulation of distribution.

Hedge funds face the potential for increased regulatory scrutiny in Japan. Direct regulation is expected to be enacted by the Financial Services Agency, specifically targeting hedge funds and managers, and changes are anticipated in the general distribution, investment management and advisory services laws as a part of the introduction of the Investment Services Law.

With the hedge fund landscape in Japan changing, what manager characteristics can generate an edge for investors? For Mr. Lawson the answer lies in how the manager approaches business development. Managers that score high marks are those that look for new analysis techniques, apply the knowledge of the home market to related stocks in foreign markets or seek ways to introduce derivative strategies to add incremental income or improve the return profile.

APasceri@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.