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launched a 12-manager fund of funds that hopes to raise ¥20 billion; the minimum investment is ¥100 million ($925,000). Nissho Iwai America Corp., a subsidiary of Nissho Iwai Corp., will open an internal fund of funds to outside investors in early 2001. The fund allocates to about 15 managers but excludes global macro, mortgage-backed securities, sector funds, emerging markets, and short sellers.

ITOCHU Capital recently introduced three products for Japanese institutions. Columbus Trust is a diversified fund of funds; Fujiyama Trust is a fund of funds that focuses on managers who trade mostly in Japanese markets; and Dynamic Selective Trust, a feeder fund, among other things combines existing funds of funds and selects single managers.

CASE STUDY INTERVIEW: LARGE JAPANESE INSTITUTION

This large Japanese institution has been allocating to hedge funds since 1996. Initially, it had allocated to a large fixed income manager. Performance was good in 1996 and 1997. And at the end of 1997, it redeemed.

The institution wanted to continue with a hedge fund program and decided to take the fund of funds route for its next step. The institution feels the fund of funds approach works best for it since the fund of funds manager closely watches the positions, leverage, allocations, and types of investments. Due to time zone differences as well as the complexity of the information required, it is difficult for the institution to run such a program from Japan. It went to an established large fund of funds that had an existing relationship elsewhere in the institution.

The institution's objective was conservative—medium-term return in the mid-teens with medium risk. The main purpose was to have the assets noncorrelated to the Japanese market where the institution has considerable exposure. The allocation represents about 1 to 2 percent of the institution's total assets.

The program, which has stayed relatively the same size for the four years, currently allocates to 30 managers. The institution wants diversification of strategies and among strategies. Significant strategy allocations are given to market neutral, market timing, and event-driven areas. Not included in the portfolio are private placements, distressed, high-yield bonds, emerging markets, or managed futures. The portfolio is reviewed twice a year for reallocation. About 25 managers have been terminated over the years for not living up to performance expectations.