Institutional Investor's Alpha Magazine - December 2007/January 2008 - (Page 40)

Asuka Asset Management implosion was triggered by the January 16, 2006, arrest of Takafumi Horie, then-CEO of Internet market darling Livedoor Co. His arrest set off a 12 percent single-day slide in the Mothers small-cap index. Horie was subsequently convicted of falsifying earnings and sentenced to 30 months in prison. When Yoshiaki Murakami, the corporate raider who was the most prominent agitator for corporate governance reform in Japan, was charged with insider trading in June 2006, sentiment further soured. Murakami was sentenced in July 2007 to two years in prison. Horie’s arrest began what proved to be the worst month in Asuka’s history — a performa nce f rom which t he ﬁrm was not able to recover in 2006. Asuka’s long-short fund slumped 4.8 percent in Febru— EDWARD ROGERS, CEO, ary of that year compared with ROGERS INVESTMENT ADVISORS a 2.18 percent decline in the Eurekahedge long-short equities hedge fund index. For the full year the fund was down 7.1 percent, compared with a fall of 3.57 percent in the index, its worst-ever annual performance. Though the Opportunities and Value Up funds also fell that year, they both outperformed their benchmarks. The former was down 1.63 percent against a 6.33 percent decline on Eureka’s benchmark index, while the latter slumped 8.79 percent, still far better than the 56 percent drop on the small-cap Mothers index. Asuka CIO Hirao describes 2006 as the toughest year of a career that began in 1987 at Salomon Brothers, where he served as co-head of proprietary trading with Taniya and also managed an ¥80 billion ($523 million) convertible bond and warrant arbitrage portfolio, as well as Salomon’s long-short equity positions. Hirao says that before 2006, it had been 17 years since he had lost money on an annual basis. “Day by day, the main market drivers of stocks were changing,” he explains. “It was a tough year to manage a portfolio.” Nevertheless, Asuka weathered 2006 better than most competitors. The ﬁrm’s assets under management actually increased 37.6 percent, despite what Rogers estimates was a net outﬂow of $15 billion from the Japanese hedge fund industry as a whole, including both domestic and offshore funds. Asuka’s ability to continue attracting capital while the rest of the industry was hemorrhaging assets can be attributed to two factors: its association with Tudor, which still owns 3 percent, and an early decision by Taniya to expand the ﬁ rm beyond traditional hedge funds. Taniya was hired by Tudor in 1999, initially to run its Tokyo-based Japanese ﬁ xed-income arbitrage operation. After the Bank of Japan decimated the arbitrage business that year by slashing short-term interest rates to near zero, Taniya instead helped Tudor launch a Japanese private equity business that generated a 40 percent annualized internal rate of return from 1999 through 2002. Hirao and Toyoda also joined Tudor in 1999. Hirao managed a $200 million Japanese equity long-short portfolio; Toyoda headed Japanese company research. Asuka’s Tudor origins bestow a degree of brand-name credibility in both high-net-worth and institutional circles. “Many funds ask Paul about us, and we are fortunate he could give us a good reference,” says Taniya, referring to Tudor founder Paul Tudor Jones II. “Tudor introduced many investors to us.” Hirao says he and Asuka’s co-founders have tried to re-create the Tudor work environment, which he describes as a “paradise,” with “no politics, hierarchy or bureaucracy.” Asuka looks to replicate that ﬂat organizational structure by giving its managers a high degree of freedom within set parameters — a commitment that the founders think helps attract and retain Japan’s top investment managers. “In most hedge funds, when the owner is a very good manager, he tends to control things,” says Taniya. “Paul was so warmhearted and so generous, he let other people take risk.” The ﬁrm inherited one additional characteristic from Tudor that has helped it market itself to relatively conservative Japanese investors: an unswerving dedication to capital preservation. “Even when they thought they were doing the right thing, if the market was against them, they left the market,” Taniya says, referring to Tudor’s insistence on stop-losses. Asuka’s funds have strict stop-loss limits of 2 percent of net asset value. Only the Value Up Fund can take single positions that are larger than 5 percent of net asset value. The other critical component of Asuka’s strategy is avoiding event risk. “Not being killed is the most important thing,” Taniya says. “It is difﬁcult to ﬁnd good opportunities, even for good fund managers. As long as we survive, we can recruit the best investment talent, and that talent can ﬁnd good opportunities.” This philosophy appeals to Japanese institutional investors, for whom the promise of high-single-digit annual returns can be attractive, says GFIA’s Douglas. This type of return, hedged into Japanese yen, is quite valuable in a market where many institutions have longterm liabilities of 2 to 3 percent and domestic bond yields are less than 1 percent. Even with the beneﬁts of the Tudor imprimatur and organizational model, however, Asuka’s survival was hardly assured. In fact, the primary reason that the ﬁrm has been able to maintain its growth is that it has diversiﬁed its business with joint ventures in funds of funds, commodities hedge funds and discretionary investing for stand-alone clients such as the Development Bank of Japan. This diversiﬁcation strategy has been responsible for most of Asuka’s asset growth since the end of 2005. “Investors are frustrated. They believe that actual hedged funds are hard to come by here.” 40 • INSTITUTIONAL INVESTOR’S ALPHA • DECEMBER 2007/JANUARY 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - December 2007/January 2008

Institutional Investor's Alpha Magazine - December 2007/January 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Liberal Returns The Good Guy: Inner-city MVP Cover Story: Marathon Men Interview: Rizk Management Profile: Living on Hostile Ground Profile: Buy and Hold In Theory: The Fallacy of Portable Alpha Strategies: Changing Course Alpha Bytes: Behind the Scenes Unhedged: Commentary: An Activist Alternative

Institutional Investor's Alpha Magazine - December 2007/January 2008

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