Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

HK Type 4 license through Ballingal Investment Advisors Ltd. ("BIA" or "BIAL")

BACKGROUND
I have 20+yrs experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies with most of that time spent managing money. 

4 years in fixed income macro, 8 years running internal hedge fund and 4yrs investment banking at Citi in Japan, 3 years running an Asia multi-strat portfolio at a hedge fund, 4+yrs as an independent special situations analyst.

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

On October 1, the GPIF released a <a href="https://www.gpif.go.jp/topics/comment_20191001.pdf" target="_blank" rel="noopener">comment</a> about a change in Investment Policy for FY19 (this year to 31-Mar-2020). It only came out in Japanese. It was previewed by an <a href="https://www.nikkei.com/article/DGXMZO50384920Q9A930C1MM8000/" target="_blank" rel="noopener">article</a> in Nikkei Business also only in Japanese the evening before.In the GPIF comment, the change is the underlined section. <blockquote>
また、為替ヘッジ付き外国債券については、 近時の市場環境下では 国内債券の代替として有効な資産となっていることを踏まえ、そのリス ク・リターン特性が国内債券に近いことを考慮して、乖離許容幅管理 上、外国債券の資産構成割合から控除し、国内債券の資産構成割合に算 入する。
In addition, for foreign bonds with foreign currency hedges attached, considering that such investments are an effective as a substitute for domestic bonds, and that their risk / return profile is close to that of domestic bonds, such investments will be removed from the asset category of "foreign bonds" and added to the asset category of "domestic bonds" for the purposes of portfolio allocation policy measures. 
</blockquote>The GPIF has a portfolio allocation policy as follows:<table class="table table-striped"><tbody>
<tr><td colspan="4" style="width: 178px;"><h2>GPIF Portfolio Allocation Policy</h2></td></tr>
<tr>
<td style="width: 178px;">Category</td>
<td style="text-align: center; width: 171px;">Midpoint and Range</td>
<td style="text-align: center; width: 168px;">Level at end-June 2019</td>
<td style="text-align: center; width: 144px;">Margin Remaining</td>
</tr>
<tr>
<td style="width: 178px;">Domestic Bonds</td>
<td style="text-align: center; width: 171px;">35% ±10%</td>
<td style="text-align: center; width: 168px;">26.93%</td>
<td style="text-align: center; width: 144px;">- 1.93%  -  +11.93%</td>
</tr>
<tr>
<td style="width: 178px;">Domestic Stocks</td>
<td style="text-align: center; width: 171px;">25% ±9%</td>
<td style="text-align: center; width: 168px;">23.50%</td>
<td style="text-align: center; width: 144px;">- 7.50%  -  +10.50%</td>
</tr>
<tr>
<td style="width: 178px;">Foreign Bonds</td>
<td style="text-align: center; width: 171px;">15% ±4%</td>
<td style="text-align: center; width: 168px;">18.05%</td>
<td style="text-align: center; width: 144px;">- 7.05%  -  +  0.95%</td>
</tr>
<tr>
<td style="width: 178px;">Foreign Stocks</td>
<td style="text-align: center; width: 171px;">25% ±8%</td>
<td style="text-align: center; width: 168px;">26.43%</td>
<td style="text-align: center; width: 144px;">- 9.43%  -  +  6.57%</td>
</tr>
<tr>
<td style="width: 178px;">Short Term Assets</td>
<td style="text-align: center; width: 171px;">no set allocation</td>
<td style="text-align: center; width: 168px;">5.09%</td>
<td style="text-align: center; width: 144px;"></td>
</tr>
</tbody></table>This has consequences.First, it provides more room under the foreign bond portfolio limits if they already have some portfolios with hedges on (and there is a little bit with a hedged benchmark). Second, IF the mandate is provided to existing mandate allocations, it would allow domestic bond portfolio managers to sell negative-yielding domestic debt to buy foreign debt yielding zero when hedged back into yen. Zero is better than negative. But there is a caveat to this already caveated position. There is also the question of who will have the right to do this, to what extent, and whether it applies to all managers - active and passive - within the domestic bond allocation.More below.

On October 1, the GPIF released a comment about a change in Investment Policy for FY19 (this year to 31-Mar-2020). It only came out in Japanese. It was previewed by an article in Nikkei Business also only in Japanese the evening before.In the GPIF comment, the change is the underlined section. 
また、為替ヘッジ付き外国債券については、 近時の市場環境下では 国内債券の代替として有効な資産となっていることを踏まえ、そのリス ク・リターン特性が国内債券に近いことを考慮して、乖離許容幅管理 上、外国債券の資産構成割合から控除し、国内債券の資産構成割合に算 入する。
In addition, for foreign bonds with foreign currency hedges attached, considering that such investments are an effective as a substitute for domestic bonds, and that their risk / return profile is close to that of domestic bonds, such investments will be removed from the asset category of "foreign bonds" and added to the asset category of "domestic bonds" for the purposes of portfolio allocation policy measures. 
The GPIF has a portfolio allocation policy as follows:
GPIF Portfolio Allocation Policy

Category
Midpoint and Range
Level at end-June 2019
Margin Remaining


Domestic Bonds
35% ±10%
26.93%
- 1.93%  -  +11.93%


Domestic Stocks
25% ±9%
23.50%
- 7.50%  -  +10.50%


Foreign Bonds
15% ±4%
18.05%
- 7.05%  -  +  0.95%


Foreign Stocks
25% ±8%
26.43%
- 9.43%  -  +  6.57%


Short Term Assets
no set allocation
5.09%


This has consequences.First, it provides more room under the foreign bond portfolio limits if they already have some portfolios with hedges on (and there is a little bit with a hedged benchmark). Second, IF the mandate is provided to existing mandate allocations, it would allow domestic bond portfolio managers to sell negative-yielding domestic debt to buy foreign debt yielding zero when hedged back into yen. Zero is better than negative. But there is a caveat to this already caveated position. There is also the question of who will have the right to do this, to what extent, and whether it applies to all managers - active and passive - within the domestic bond allocation.More below.

Japan Treasury

Mind the Gap! GPIF Goes Basis Hunting