Non-Japanese Alternative Investment Funds offered in Japan

The prospect of greater returns from alternative investments is very attractive to both institutional investors and high net worth individuals, especially in a zero-interest-rate environment. In the current situation, where it is difficult to make a profit by investing in traditional assets such as bonds, wealthy individuals are increasingly willing to take risks and invest in potentially profitable products.

Furthermore Japanese high net worth individuals are seeking opportunities to invest in alternative investment funds with low correlation to traditional assets, as volatility has been increasing due to the prolonged effects of the COVID-19 pandemic and the war in Ukraine.

In response to these demands, there have been developments in the methods used to market non-Japanese alternative investment funds to Japanese retail investors.

Japanese law generally divides non-Japanese investment funds into three different categories: investment trusts, investment companies, and limited partnerships. The required registrations and licences for investment funds are substantially different, depending on the type of investment funds. Consequently, there are differences in the kinds of Japanese investors that fund managers can accept investments from.

The investment trust is one of the most popular for among Japanese investors. In fact, units of non-Japanese investment trusts are actively offered and sold to Japanese investors by securities companies and banks. Some securities firms actively offer shares of various types of non-Japanese investment companies, such as SICAVs (société d'investissement à capital variable) established in Luxembourg, to Japanese retail investors.

From a Japanese law perspective, non-Japanese investment trusts and non-Japanese investment companies may offer their units and shares to Japanese investors, regardless of the category of such investors (except in cases where offerings are conducted under the private placement to Qualified Institutional Investors (QII) or Professional Investors), if a distributor with an appropriate licence under the Financial Instruments and Exchange Act of Japan (FIEA) is appointed and delegated with respect to the entire offering. This is because management companies of non-Japanese investment trusts and non-Japanese investment companies are not, in principle, subject to financial instruments business regulations.

A limited partnership is mainly utilised for the purpose of private equity investments. This type of non-Japanese investment fund is not common for Japanese retail investors, and most investors are institutional. Under Japanese law, non-Japanese limited partnerships often cannot accept investments from Japanese retail investors, even if a placement agent with the appropriate licence under the FIEA is appointed and delegated with respect to the entire offering. As a general rule, the general partner of a non-Japanese limited partnership is still required to obtain an investment management licence under the FIEA.

The most common exemption available for a general partner without an investment management licence is the Exemption for Special Business Activities for Qualified Institutional Investors (the “QII-Targeted Fund Exemption”) under the FIEA; however, there is a limitation on the category of Japanese investors under the QII-Targeted Fund Exemption. To rely on this exemption, at least one of the fund investors must be a QII, such as a bank or an insurance company. Additionally, the number of Japanese non-QIIs should not be more than 49 and each Japanese non-QII must be an “Eligible Non-QII”, which is an investor who meets certain requirements, such as an individual whose financial assets are reasonably expected to be no less than JPY100 million and who opened their securities account more than one year prior to the investment.

In recent years, access to non-Japanese alternative investment funds by Japanese retail investors has increasingly been through newly established feeder funds. There are several cases where non-Japanese alternative fund managers and Japanese securities firms have collaborated to establish non-Japanese investment trusts overseas (such as Cayman, Luxembourg and Dublin) as feeder funds of non-Japanese alternative investment funds, with Japanese retail investors acquiring units in such non-Japanese investment trusts.

By investing in these feeder funds, Japanese retail investors are able to gain exposure to non-Japanese alternative investment funds. In addition, regardless of the attributes of Japanese retail investors, non-Japanese alternative fund managers may accept investments indirectly from Japanese retail investors. Units of such feeder funds may be solicited through private placement or public offering in Japan.

Under the laws of Japan, there are no specific requirements imposed on private placement funds. Conversely, publicly offered funds are subject to strict investment restrictions, but it is still possible under the laws of Japan to publicly offer alternative investment funds.

It should be noted that the key characteristics of alternative investment funds must be sufficiently disclosed as necessary to enable investors to make accurate investment decisions.