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risks differently from each other. As a result, it is difficult to summarize the risks of a pool of hedge fund managers in a comprehensive manner. Transparency would go a long way to resolving this issue, concludes Anson.

JAPANESE ACTIVITY

Japanese institutions are increasingly allocating to hedge funds due to lack of investment opportunity in a very low interest rate environment, and a negative carry problem. At the time of the stock market bubble, life insurance companies raised money from mutual fund investors, promising very attractive returns. As interest rates fell sharply, negative carry occurred.5 To fill the gap, some Japanese insurance companies are investing in hedge funds.

It is estimated that those institutional allocations are about $6 billion and are expected to grow three to four times in the next four years. One example is Sumitomo Life, which announced its intent to invest 5 percent of its $220 billion assets in hedge funds. Sumitomo Life is the most active insurance company in hedge funds.6 It is believed that the current allocation is less than 1 percent or about $2.2 billion. Sumitomo's fund of funds—it had allocated to about 10 U.S. and European fund management companies which in turn invested in hedge funds—has assets of ¥100 billion ($911 million) with the expectation that it will grow to ¥350 to ¥400 billion ($3.2 billion to $3.7 billion). The goals are to return 5 to 7 percent over LIBOR for yen interest rates, to diversify the company's investment mix, and to improve returns through diversified sources.7

Daido Life Insurance Company, jointly with Mitsubishi Corp., set up a ¥10 billion fund to invest in U.S. and European managers. About 5 percent of the assets goes to alternative investments.

In a bid to diversify its portfolio and raise returns, Tokio Marine & Fire Insurance Co. plans to expand alternative investing to include private equity and hedge funds to ¥100 billion ($911 million) in four years.8

Many of the Japanese institutions view alternative investments as a fixed income substitute. The institutions are looking for a low-risk, low-volatility product that has a simple strategy and is transparent.

Meanwhile, Japanese trading companies are also setting up products for their Japanese institutional clients. For example, Nikko Securities