Tokyo-based AIJ Investment Advisors lost $1.3 billion (819.2 million pounds) in bad bets on equity and bond derivatives, losing the bulk of the pension funds it was managing, Japan's financial regulator said on Friday after stripping the firm of its registration.

The Financial Services Agency (FSA) said AIJ, whose offices were earlier raided by the Securities and Exchange Surveillance Commission (SESC), was unable to account for most of the $2.4 billion assets under its management and had falsified its report to investors to cover up its losses in one of the biggest scandals of its kind in Japan.

The SESC has started a compulsory investigation today, Financial Services Minister Shozaburo Jimi told a news conference. We regret that there was a serious falsehood in (AIJ's) business report.

The FSA, under fire for failing to prevent the scandal, has launched an investigation into all 265 discretionary asset managers in Japan.

Pensions are a sensitive political issue in Japan, a rapidly ageing society that is grappling with how to pay for its swelling population of retirees.

An official at the SESC said AIJ President Kazuhiko Asakawa traded Nikkei 225 futures and options and Japanese government bonds futures and options through brokers in Singapore.

Asakawa's basic strategy was to bet against the market trend, giving frequent investment instructions to brokers, the official said.

He was a contrarian. His basic strategy was to short JGBs, betting that yields would go up, the official said in a separate briefing. He suffered a massive loss after losing the right timing to hedge against or unwind his positions.

The SESC said it has found AIJ's investment loss totalled 109.2 billion yen ($1.32 billion) from derivatives trading conducted between 2002 and 2011. During the period, AIJ collected about 145.8 billion yen, mostly from small companies that entrusted the asset manager with their pension funds.

As of December, the number of investors in AIJ's funds totalled 104 clients, including 92 corporate pension funds, the SESC said.

Japanese politicians are considering regulations such as limiting risky investments to give great protection to pensions.

Unlike banks and brokerages, investment advisory firms are not regularly inspected by regulators and their filings are not so closely scrutinised, raising concerns about the safety of the pension money they manage. ($1 = 82.4950 Japanese yen)

(Reporting by Taiga Uranaka, Emi Emoto and Chikafumi Hodo; Editing by Richard Pullin and Alex Richardson)