CULTURAL ARBITRAGE
Foreign Hedge Funds Pursue
Opportunities in Japan
From his office in an old villa, Guy Cihi (pronounced see-he) could
just view the spires of Florence peeking above the green canopy of
his olive trees, beyond the edges of his emerald swimming pool.
He spent much of 2000 at his desk, drafting documents to be
reviewed by lawyers in Tokyo and the Cayman Islands. Even though
he had never before managed a hedge fund, he was convinced that he
and his partners could compete against the oldest, most prestigious
names in global finance. All the conditions were in place, he believed,
for Japanese investors to pour money into his new fund.
Although he was new to hedge fund management, Cihi had 15
years experience in Japan, and was described as a “genius” at using
software to analyze and reach the country’s target markets. He had
already made a tidy fortune marketing U.S. intellectual property
3
57
throughout Asia. Not short on confidence, and lanky with high cheek-
bones and salty brown hair, he sizes up people quickly with a disarm-
ingly frank glance. He is quick to admit that he has a low tolerance for
nonsense, and one pities unprepared brokers who call on him and try
to bluster their way to a sale.
His previous company, Learning Technologies, used innovative
marketing techniques to zero in on sources of demand with a sharp-
shooter’s precision. His acquaintance with them began in the mid-
1980s, when he had just left school and was employed with a
technology consulting firm.
Learning Technologies had recently emerged from bankruptcy
and needed help exporting electronic devices and intellectual prop-
erty to Japan. “All my other clients were scrambling to keep up with
the onslaught of superior Japanese products, taking away their mar-
ket share,” Cihi remembers. “I was very intrigued by this particular
client. It ran against the tide.
“I felt that I needed to get closer to their sources of demand in
order to be able to propose workable solutions,” Cihi adds thought-
fully. “That seems to be one of the major themes of my life, seeking to
understand what drives demand.”
He ended up buying into Learning Technologies with money
borrowed from his father and moved to Japan in 1985. From a tiny
presence and $1.8 million in sales, Cihi and his partners eventually
built it to over $300 million in revenues. The company sold subscrip-
tions for research and other forms of intellectual property procured
from top universities in the United States. This included academic
research, software, and educational courseware.
Cihi’s work led him to develop an understanding of how different
products and services appealed to different demographic segments.
He was surprised to find that demographic segments were not evenly
distributed throughout the country, so he went about breaking down
the relative scale of each targeted group. “We didn’t go about it
58 THE JAPANESE MONEY TREE
anecdotally. We implemented a strictly statistical approach and devel-
oped proprietary software systems to crunch the numbers,” he says.
To this day, he remains confident in his systematic approach for
determining how different population segments react to new ideas.
He sold half his ownership in Learning Technologies in 1999,
deciding that he wanted to explore new business opportunities
offered by the Internet. Considering that profitability of his old firm
was a striking 28% after taxes and that he still owned shares in the
reliable cash cow, he adds wryly, “I didn’t do half bad off that deal.”
Before the year’s end, he left for Italy with his family for a break on
his farm near Florence.
Having acquired substantial liquid assets from the sale of the
firm, a parade of professional financial advisors from blue-chip
investment houses soon began contacting him, offering help with
managing his portfolio. He listened to their pitches but was not
impressed. “The things they were saying didn’t sound logical to me. I
have a sensitive BS detector.” The salesmen often fumbled for
answers when Cihi pointedly asked for specifics of their asset-man-
agement strategies.
Battle-hardened professional traders opened his eyes. While
attending venture capital conferences, he met two investment bank
money managers—one from New York, the other from Tokyo. They
confided in him how their business really worked, friendships devel-
oped, and a partnership formed. “I mean, think about it, why exactly
would investment banks want to help smaller investors make
money?” Cihi asks rhetorically. “It’s the little guy’s money they want to
take. It’s a zero sum game.”
A big balance sheet to play with is a huge resource for trading
desks, and the ultimate balance sheet in Japan is the cumulative sav-
ings of households. A classic example of the inherent potential for
conflict in the industry is Big Project N, a Japanese fund launched by
Nomura Asset Management Co. in February 2000. The fund raised
CHAPTER 3•CULTURAL ARBITRAGE 59

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