The Financial Supervisory Service of South Korea will work to allow onshore hedging strategies by the close of 2009, says Park Won-ho, the outgoing director of asset management supervision.

Every other year or so, executives at the FSS rotate. Park will leave his job but was not able to disclose his next position, nor his successor.

He believes the FSS has played an active role in helping develop KoreaÆs mutual-funds industry under his watch. This includes amending laws and regulations to allow fund managers to invest in a wider range of asset classes, such as real estate. It worked with the Ministry of Finance and Economy to cut taxes on locally domiciled funds that invest in international equities, and a few years ago allowed funds to be sold via banks. The FSS is also keen to develop Seoul as a regional hub for asset management.

But he says private equity and hedge funds are two areas of ôunfinished businessö. The FSS allowed local private-equity funds three years ago but these have yet to take root, despite a few success stories such as Michael KimÆs MBK Partners. Park reckons the industry needs another two years to season before private equity becomes a mainstream domestic asset class.

The biggest challenge for the regulator has been hedge funds. When asked to define a hedge fund, Park notes there already exist onshore funds that are colloquially known as æhedge fundsÆ, which are investment schemes offered through private placement to a limited number of investors, but which cannot use leverage or short stocks. He says the FSSÆs main concern is whether by allowing these activities they would introduce instability to local markets, or blunt the governmentÆs influence over market levels.

The FSS has drafted an outline to introduce leverage and shorting by the end of 2009 over the course of three stages. Initially such products will be limited to qualified institutional investors. The FSS hopes, unofficially, this can be achieved by August 2009. The second stage would widen the customer base. Stage three involves developing a consistent regulatory treatment for alternative investment funds.

The timing of stages two and three depend on market developments, Park says. But the new government under president Lee Myung-bak is committed to deregulating the economy, including the financial sector, and FSS officials are being encouraged to promote innovation.

Meanwhile, the true Korean hedge-fund scene is exploding û but in Singapore and Hong Kong, where long/short and other types of hedged portfolios are managed, often with firms keeping a research desk onshore in Seoul. The FSS hopes it can entice such managers to return to Korean soil by allowing leverage and shorting.

ôWe understand foreign investors see our market has more regulation,ö he says. ôIÆd say our market has great potential to grow, while [Hong Kong and Singapore] markets are mature. The penetration of investment products among individuals here is still quite low, and our pension product is just at a starting point.ö

He believes current concerns among financial participants regarding the implementation of KoreaÆs new Capital Markets Consolidation Act û many details of which remain unknown, and which will depend on regulatory interpretation û will lessen as the FSS continues to issue bylaws. ôThere are always difficulties with new products and services,ö he says. ôOur goal is that anything is allowed unless it is specifically prohibited.ö

One such area that could affect hedge funds is the CMCAÆs allowing some managers freedom to charge performance fees, under limited circumstances. The FSS is now working on detailed criteria, which could include a provision that would also require such contracts to require fund managers also give up management fees in cases of poor performance. But Park also says performance fees are being considered on their own merits and have nothing to do with plans to allow leverage or shorting.