AIJ Investment Advisors was temporarily shut down by Japanese regulators on Friday over fears that it may have concealed substantial losses in the $2.6 billion it manages, mostly for the pension plans of small- and medium-size corporations.
Reuters reported that the Financial Services Agency said it was still investigating the amount of losses, but cited an unidentified source that said the agency is concerned that the substantial losses it has found may be permanent. A BBC report said that regulators have been investigating AIJ since January and fear that most of the money is gone; if so, this would be one of the largest financial scandals of its kind.
The Tokyo-based AIJ, which has had its funds frozen and been ordered shut down for a month, operated like a hedge fund and pursued absolute returns regardless of market conditions. Corporate pension funds in Japan have been using hedge funds and other alternative investments since around 2005, looking for higher returns than near-zero interest rates and the weak outlook for Japanese stocks could provide long term.
AIJ’s fund manager had claimed to prospects that it could provide cumulative returns of up to 240%. It began operations in 1989 and in the last 10 years expanded quickly thanks to its promises of a positive return despite down markets.
According to its filing with the industry association, its investment strategy was centered on shorting Nikkei 225 options and other equity and bond derivatives. In the filing it said, “We specialize in so-called alternative asset management, an alternative to the traditional investment assets of domestic stocks and bonds. That allows us to seek absolute and steady returns not tied to the direction of the markets.”